Drip Portfolio Report

<THE DRIP PORTFOLIO>
Capping Off Oil
Our decision and... Touchstone Friday

by Brian Graney (TMFPanic)

ALEXANDRIA, VA (March 26, 1999) -- Today, we will try to sum-up our thoughts about the oil and gas industry in 1,000 words or less. Sounds tough, right? Hardly. After a five-month-long industry study, Jeff and I quite frankly don't have much more to say. Most of our thoughts on this investment topic are out there collecting dust in the Drip Port archives, waiting to be read someday by a wildcatter in Texas with chronic insomnia.

Yesterday, we compared Exxon Mobil and BP Amoco side by side. These are both excellent companies, as far as integrated oil and gas companies go. They are the creme of the oil patch. Both have been steady, consistent performers over the years, building shareholder value with the same verve that Dagwood Bumstead builds a triple-decker club sandwich. Exxon (NYSE: XON) is the current profitability leader among the majors in virtually every oil and gas category out there, from exploration and production to refining and marketing to petrochemicals. BP Amoco (NYSE: BPA) has a dedicated management team that is cutting costs to the bone in order to turn the company into the leanest, most efficient integrated firm it can be.

For the most part, either of these two giant companies would likely be a good investment for long-term investors interested in the oil industry. Additionally, Royal Dutch/Shell Group fits this bill, too. We cut it from our list of candidates early on due to its high Drip fees and its archaic, puzzling, dual-company operating structure. As we moved along in our study, however, it became clear that RD/Shell is following in BP Amoco's footsteps and is reinventing itself to better compete in the oil industry of tomorrow, rather than the one of yesterday. Investors might want to disregard our slacker example and take a closer look at what this company is doing and where it is headed. Here's a link to the Shell website to get you started: Click me!

So, what are we going to do? Are we going to invest this portfolio's dollars in BP Amoco's Drip, adding that company to our pantheon of equity superheroes along with Intel, Johnson & Johnson, Mellon Bank, and Campbell Soup? Or are we going to buy shares of Mobil (NYSE: MOB), betting the merger with Exxon will go through and arbitraging the $5.18 discrepancy between Exxon's proposed buyout price of $94.31 per share and Mobil's closing price yesterday of $89.125 per share into a snazzy short-term gain? (Don't get any funny ideas, Jeff.) And what about our third finalist, Pennzoil-Quaker State (NYSE: PZL)? Are we going to buy anything?

Well, maybe.

We picked an interesting time to study oil and gas. The industry is consolidating, the leaders of tomorrow are jostling for competitive position, and the sector looks to be more focused on the ideas of profitability and building long-term shareholder value than any other time in recent memory. These changes are mainly what prompted Foolish Drippers to pick this industry for a comprehensive study in the first place. But despite everything we have learned over the past few months, we have concluded that we are not ready to become 20-year business owners in one of these companies. At least not yet.

As Jeff reminded us in a column last week, investing in any of our finalists right now would mean ignoring one the founding tenets of this portfolio. As Jeff put it, "We do not want to invest in a declining industry, a fad industry, or when an industry is undergoing enough competitive realignment that the players and competitive landscape becomes muddled." We would feel better about making an investment decision in this industry after our three finalists, which were six separate companies as recently as three months ago, have a few quarters of operating history as combined entities under their belts. Remember, Pennzoil-Quaker State and BP Amoco as we now know them are all of 85 days old, while Exxon Mobil is months away from becoming a reality.

If we had to choose a favorite right now, we would select Exxon as the top dog with BP Amoco running a close second. We like the large integrated companies the most based on the high profitability of the exploration and production business relative to other oil-related pursuits, the competitive advantages afforded to the large-scale "super-majors" compared to smaller companies, and the recent performance of these two companies in the midst of a difficult oil and gas price environment. In the end, though, Exxon's industry-leading profitability performance pushes it ahead of the new-look BP Amoco in our eyes.

Mobil sneaks into third place, since we are uncertain how the company would respond if the merger with Exxon fell through. Amazingly, Pennzoil-Quaker State finishes fourth in what was only supposed to be a three-horse race. This company has the most near-term challenges to overcome of any of our finalists, as Jeff detailed earlier this week.

So, Jeff and I are sitting on our hands, like Forrest Gump waiting for the bus to come. Exxon, Mobil, BP Amoco, and Pennzoil-Quaker State are officially on the Drip Port's watchlist. We will be closely monitoring their individual progress in the months to come, with preference given to Exxon. In the meantime, we are already looking for more investment opportunities in other areas. More on that next week.

Touchstone Friday. Here's what the Drip Port elves were doing this week, in random order to celebrate the winding, twisting path of our now-completed oil and gas study. On Wednesday, Jeff took a second look at oil and gas finalist number one, Pennzoil-Quaker State. His first look was on Tuesday, for those who believe in the importance of order in our universe.

On Thursday, Exxon Mobil and BP Amoco were compared side-by-side. And in true paradoxical fashion, we have saved the first for last. On Monday, George offered an interesting column on the disadvantages of Drips, or rather what a smooth-talking broker might term as the disadvantages of Drips.

Fools know better, and they are sharing their knowledge and experiences on the Drip Companies message board every day. Feel free to share your thoughts about Drip investing, our oil and gas investment non-decision, or the general order of the universe by posting a message there this weekend.

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