Bearish Short-Term Outlook For Oil Stocks

Highlighted stocks include: Anadarko Petroleum Corporation (APC - Analyst Report), BJ Services Company (BJS - Analyst Report), Dril-Quip, Inc. (DRQ - Analyst Report), Exxon Mobil Corporation (XOM - Analyst Report) and Precision Drilling Trust (PDS - Snapshot Report)

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OPEC Cutting Production

At today's meeting, OPEC ministers agreed to a production cut of 2.2 million barrels per day, which equates to a 4.2 million per day reduction from September levels. In addition, Russia, Syria and other non-member countries are also likely to lower production levels.

The moves are in response to the $100+ drop in oil that has occurred since Jul 11. The global economic slump, and forecasts for reduced consumption next year, has oil producers concerned about a loss of revenues.

Though OPEC members have a long history of violating quotas, production levels should drop after the meeting. The commodities markets, however, are unimpressed as crude was trading at just $43 per barrel this morning.

The Impact on Oil Stocks

For investors, today's meeting won't have any meaningful short-term impact. The "magic" number for many companies is believed to be about $65 per barrel. Oil prices below this level discourage capital investment and production. Prices above this level encourage more activity.

Not a line in the sand, per se, but a good benchmark for gauging what the industry is going to do.

The other issue is the credit markets. Even for companies with strong cash positions, access to debt financing remains difficult and expensive. This also discourages investment.

It is this combination of low oil prices and a lack of financing that has led brokerage analysts to continue lowering 2009 profit forecasts on a large number of oil-related stocks. The downward revisions span most of the energy sector including exploration and production company Anadarko Petroleum Corporation (APC - Analyst Report), services provider BJ Services Company (BJS - Analyst Report), equipment maker Dril-Quip, Inc. (DRQ - Analyst Report) and driller Precision Drilling Trust (PDS - Snapshot Report).

Even conglomerates like Exxon Mobil Corporation (XOM - Analyst Report) are seeing their consensus earnings estimates lowered.

BJS and PDS are Zacks #5 Rank ("strong sell") stocks. APC. DRQ and XOM are Zacks #4 Rank ("sell") stocks.

Crude Will Rebound

Crude prices will not stay at current levels, though the timing of the rebound is uncertain. It will be soon enough, however, to make recent buyers of new SUV question their purchases. Bluntly put, enjoy the cheap gasoline prices while you can.

Long-term investors should not be in a rush to buy oil stocks, though long-term valuations are cheap. Therefore, it makes sense to continue eyeing the sector, even if the short-term outlook is not positive.

An alternative method is to look at pipeline partnerships. Our senior oil analyst, Sheraz Mian, discussed these in a recent blog post. Among the stocks he likes are Enterprise Products Partners L.P. (EPD - Analyst Report), NuStar Energy L.P. (NS - Snapshot Report), Energy Transfer Partners, L.P. (ETP - Analyst Report) and Kinder Morgan Energy Partners LP (KMP - Analyst Report).

Though opportunities for short-term capital appreciation might be small, all of these partnerships yield attractive dividends.

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Industry Groups

Because the weakness in crude prices affects the entire sector, I covered multiple industry groups this week. The specific groups are:

• Oil & Gas-Drilling - Precision Drilling Trust
• Oil Field Machinery & Equipment - Dril-Quip
• Oil-Field Services - BJ Services
• Oil-International Integrated - Exxon Mobil
• Oil-Production/Pipeline - Enterprise Products Partners, Energy Transfer, Kinder Morgan and NuStar.
• Oil-U.S. Exploration and Production - Anadarko Petroleum

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Related ETFs

There are several ETFs that target the oil sector, though most specialize in certain segments such as drilling or oil field services. The fund providing the most broad coverage might be Energy Select Sector SPDR (XLE).

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Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Sector Rank as of Dec 17
Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY09 Revisions Ratio	FY09 Estimates Revised Up	FY09 Estimates Revised Down	FY08 Revisions Ratio
Medical	2.55	2.55	0.45	134	300	0.45
Aerospace	2.76	2.83	0.36	16	44	0.42
Computer and Technology	2.89	2.92	0.12	111	913	0.21
Business Services	2.94	2.94	0.14	11	76	0.31
Consumer Discretionary	2.98	3.01	0.24	54	221	0.31
Transportation	3.03	2.97	0.19	52	274	0.29
Utilities	3.05	3.04	0.22	29	132	0.55
Consumer Staples	3.08	3.10	0.14	27	198	0.27
Retail-Wholesale	3.11	3.17	0.09	52	568	0.22
Construction	3.16	3.12	0.15	9	61	0.15
Finance	3.18	3.19	0.09	82	867	0.17
Industrial Products	3.23	3.18	0.09	19	202	0.14
Oils-Energy	3.26	3.28	0.11	78	733	0.25
Basic Materials	3.34	3.27	0.06	18	302	0.10
Auto-Tires-Trucks	3.53	3.55	0.03	2	72	0.11
Conglomerates	3.63	3.67	0.00	0	73	0.03

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.