Mr. Herrlin: Basically the stock performance has been poor. Year to date my large cap group is down about 12%, my mid-cap group is down 38%, and my small cap group is down about the same, 38%. The top 65 companies that we track are now worth about $58 billion. That's an improvement over where they were, say, a month ago at $53 billion, but they've still been hit. Given a 25% decline in oil prices, extremely volatile natural gas prices, negative sentiment about large U.S. gas storage inventory builds, and investor concern about higher operating costs and shrinking gross operating margins, it's easy to understand why they've been hit. We think that investor sentiment is changing. Between now and year-end, we expect stocks to rebound because of a more quota-disciplined OPEC, a new market understanding that countries like Russia won't be able to increase export capacity, and the fact that the world economies are not going to have demand growth for oil plummet so severely that we're looking at single-digit barrel pricing. We don't view most Western nations as having economies that are as energy intensive as in the past, but we recognize the downside to the 'Asian flu' on oil prices. Domestically, we've seen oil prices rebound recently because of low API inventories. Hopefully, that trend will continue, especially with all the storms in the Gulf of Mexico. The loop facility has been closed or running at reduced rates of capacity throughput. And the gas side, the EIA, Energy Information Administration, just released their annual summary, which is a reserve analysis for the whole country for 1997. They always publish the review of the prior year in September or October. In the lower 48 states, the U.S. had no reserve growth, despite high rates of drilling activity. Much of the reserves added were in places that don't have the ability to increase near-term deliverability. So we could see the gas market stay firm. The other reason gas has been weak is the fear of new Canadian import lines and high domestic gas storage inventories. Given the fall in rig counts offshore, reduced reinvestment drilling could cause a decline in output in 1999. So we might need the gas in storage and the Canadian imports, especially if we have a normal winter. Many in the investment community sold these stocks during the summer, and they totally capitulated in August. Institutions dominate ownership of the stocks in my sector and got out of these stocks because they feared a 1995 natural gas price collapse would occur in 1999. During the 1992 to 1994 period, the U.S. had a big buildup in gas production. And then it had to absorb a new Canadian import pipeline (PGT), which collectively proved to be too much for the market to absorb. They drew the same analogies in 1998. What I'm trying to say in a circuitous way is that situation may not be happening. But getting back to your original question, my stocks have lagged the market. Integrated oil companies and the pipelines fared better. My companies did outperform the oilfield services companies, but as I said, they're still down.
Tickers included in this excerpt: APC, BRI, COG, EEX, EOG, NBL, NFX, OEI, ORX, PPP, SGO, VPI, VRI
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