Judgment Day
The verdict on Sunoco, Phillips, and UDS

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (March 2, 1999) -- Last week, we left it up to you, the Drippers of Fooldom, to decide whether to scrap Phillips Petroleum, Ultramar Diamond Shamrock, and Sunoco from our list of oil and gas candidates or advance them into our study's second round of consideration. Over the past several days, the Drip Companies message board has been humming with activity -- points were made, opinions were expressed, concerns were raised, and recipes were shared. (Hey, everyone needs to eat, you know.) After much discussion, here is the final judgment:

We are canning all three.

That's right, sayonara Sunoco. Fugeddaboutit, Phillips. Make sure to close the door behind you, UDS. All three companies are going the way of Apache, Baker Hughes, and Kerr-McGee and are being removed from consideration as possible Drip investments by this portfolio.

Sunoco won very little support from Foolish Drippers due largely to its poor share price performance over the past 15 years or so. While relying on past performance figures alone is a poor way to pick stocks, we like to consider companies that have a track record of consistently beating the market averages over large periods of time. Over the past 15 years, Sunoco has met or beat our long-term average annual return target of 15.5% five times (1985, 1988, 1989, 1991, and 1997.) That is actually a better record than I had initially expected, but it lacks the consistency we are looking for with a 20-year investment.

For Phillips and UDS, the jury was split right down the middle -- half of those responding wanted to look at the companies more closely in the second round, while the other half had already heard enough and wanted to move on. We interpreted the lack of a consensus as a less-than-ringing endorsement for the two companies' future prospects, so we are not including them in our second round either. Many of the Drippers who posted opinions expressed concern over the companies' high debt loads and relatively low profitability positions, weaknesses that also bothered Jeff. I had trouble predicting with any kind of confidence how the two companies will perform in the future under their new Diamond 66 venture, so I raised no objections to looking elsewhere with our investment dollars.

This does not mean that these three companies are terrible investments. We are not in the business of handing out recommendations on various companies willy-nilly, and our decision not to invest in Sunoco, Phillips, or UDS should not be viewed as a "sell" rating or some similar nonsense.

Rather, these three companies simply failed to meet enough of our stated goals to become new additions to our portfolio. We believe setting good investment principles and sticking to them is the cornerstone of successful Drip investing. Throughout our selection process, the burden of proof is placed firmly on the heads of the companies we are examining. If a company is unable to bound over our admittedly high selection standards with a fair amount of grace and ease, then we will look to another hurdler to join our Drip relay team and carry our investment baton. This philosophy will not change. Twenty years from now, it is our hope that this column will be saying the same thing, just worded differently and with fewer bad jokes. (How's that for predictability?)

At this point, it may be useful to review the investment process we use here at the Drip Port. From a personal point of view, finding a good long-term investment reminds me of the Easter egg hunts my parents used to conduct when my sisters and I were young. During the hunt, the best results typically went to the person who looked under the most rocks and behind the most trees. A quick glance around the backyard yielded little, if anything at all. However, by expanding the searching parameters to encompass the wood piles, the flower garden, and other out-of-the way places, more painted eggs could be found. And with perseverance and some creative thinking, the coveted hollow plastic egg might even turn up, entitling the finder to the crisp, new five dollar bill tucked neatly inside.

Similarly, finding a good long-term investment is a search, so we are not discouraged that we have yet to uncover a plastic egg to cherish during our ongoing study of the oil and gas industry. In the 19 months since this portfolio was created, only four companies have been welcomed into the fold. Over the course of the next 19 years, the plan is to invite maybe three or four more to the Drip Port party. We can afford to be choosy, and we are this way on purpose.

Moreover, since we are happy with the investments we have made thus far, the onus is really on the companies we are looking at to prove to us that they are worthy of our investment dollars. This is not a mutual fund, where a higher-up stuffed shirt is looking over our shoulders every quarter to see if we picked the "hot stocks" or the latest craze-of-the-month. If all of our stocks tank next quarter, that will stink, but we will deal with it. The only quarter we really care about from an investment performance point of view is way off in 2017.

Tomorrow, we'll examine Texaco and next week we'll look at USX-Marathon and Ashland to see if they have the stuff to advance to Round 2, joining BP Amoco, Exxon Mobil, and Pennzoil-Quaker State. As we move toward an investment decision in this industry, keep in mind the key characteristics that each of our first four investments exhibited at the time we purchased them:

* Industry leadership positions
* Strong shareholder return track records
* Consistent cash flow growth over long periods of time
* Proven management teams
* Attractive valuations.

These are the elements we are looking for in our next investment. And no, don't expect them to change in the years ahead, either.

Fool on!

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