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Three analysts and top management from three sector firms examine the integrated oil producers sector in this special 37-page Integrated Oil Producers issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info518.htm

TWST: What is the business of an integrated oil company? What are the sources of revenue?

Mr. Harbison: It’s primarily a combination of what we call upstream and downstream. Upstream is the exploration for and production of oil and gas; downstream is the business of manufacturing and selling oil products such as gasoline or diesel. A number of the major companies have chemical businesses that tend to be based on their refining businesses. Increasingly, the integrated companies are investing in what we call the downstream gas businesses, which would extend all the way to electricity generation, but that’s still a small business for the big oil companies. Others could correct me, but I think, typically, in terms of cash flow or assets, the upstream may be 60%, the downstream may be 30% and the others may be 10%.

TWST: Stan, what would you add to an industry status report?

Mr. Harbison: Michael’s last comment leads me to draw a distinction, and it’s one that we just made here in our coverage comments. Broadly speaking, there are two groups of companies in which to invest: 1) those whose cash flows and value key off the global oil price and the state of downstream oil margins; and 2) the North American-based companies whose values depend strongly on the level and direction of the US natural gas price. Those are the stocks Michael just mentioned. The natural gas-based group would include almost all of the E&P companies, although not all. That group would also include the great majority of North American-based oil service and drilling stocks, because their business is, by and large, driven by an acceleration or deceleration of activity in the Natural Gas Patch. In fact, at the current time, we are in a real depression in the natural gas industry, although the price has jumped very sharply in the last month or so. There remains a huge storage surplus. We’ve had very low prices and drilling activity is very low. I think investors are correctly starting to become uncomfortable just sitting there waiting for recovery while promises of a future market remain apparently far off. They’re anticipating that there will be a change for the positive. The rest of the stocks will key much more off of oil and oil product fundamentals, meaning basically the level and direction of oil prices. Like natural gas, oil prices have risen sharply in the past month or two. Oil product prices and margins have not moved up as sharply. But they’re beginning to move up a bit with the slowdown in product production and the liquidation of excess oil inventory. So you can very easily have diverging performances between big groups of stocks. The big integrated companies and most of the European companies will not react very much to US natural gas prices. But there are about 20-30 North American companies which have grown over the past few years and are now substantial in size (with $3 to $5 billion market caps) that are primarily revolving around US natural gas.

TWST: Stan, will consolidation be a factor with regard to growth? What will spur growth?

Mr. Harbison: The more you see a broad consolidation of the largest companies, the less you’re going to see a big industry consolidation. There just aren’t very many large opportunities left that are pragmatic. Plus, I think that if success is measured in the stock price several years out, none of the mega-mergers has been a disaster, but none has been a stock market winner. BP (NYSE:BP) had a tremendous boost of confidence, particularly in its home market — the equity market in the UK — on the announcement of the Amoco merger in August 1998. I think it was up 25% versus the other oils over much of the next year. But it had a fiasco with ARCO and the subsequent rulings by the US Federal Trade Commission. Added to the problems was BP’s decision to eliminate their entire maintenance capital budget in the year following the Amoco purchase. This led to a deflation of market expectations about a bigger, stronger company emerging from the two mergers. Their growth, which was believed to be quite strong, fell apart and now with the repair of the growth story, the stock is trading at about the same relative position (vs. its peers) as it was prior to embarking on the mergers.

This special issue includes:

1) Integrated Oil Producers - In an in-depth (13,700 words) Analyst Roundtable, Fadel Gheit, Senior Energy Analyst at Fahnestock & Company, Inc., Stanley Harbison, Senior Vice President at Zurich Scudder Investments Inc. and Michael C. Young, Managing Director at Gerard Klauer Mattison & Company, Inc., examine the outlook for the sector including dividend growth, pricing outlook and share specific stock recommendations.

2) TWST confidential Off-The-Record survey of management performance of eight sector firms asked market insiders about the ability of management teams to create shareholder value.

3) CEO interviews (average 2,500 words). Top management of three sector firms examine the outlook for their firm and the sector.