Take some profits on oil stocks

US equities

The US No3 integrated oil company ConocoPhillips (COP, $54.31, CSFB: Outperform) announced that it has got the approval from the Australian authority for the development of a $1.5 billion natural gas development in the Timor Sea area and a liquefied natural gas plant on the northern Australian coast, including a pipeline linking the plant with the Bayu-Undan gas field.

The approval is a significant step for ConocoPhillips and Italy's ENI, its main partner for this development. The company schedules to start delivering liquefied natural gas (LNG) to Japan's Tokyo Electric and Tokyo Gas from January 2006. LNG is expected to see a strong demand growth over the next 4-5 years and the Bayu Undan field could therefore become a strong earnings driver for ConocoPhillips. The company stated that the field would yield 400 million barrels of condensate, a light crude, and liquefied petroleum gas, and 3.4 trillion cubic feet of natural gas.

Crude oil prices over the last week were quite volatile, ahead of the OPEC meeting last Wednesday. The market had anticipated a cut in OPEC production earlier, but the closer the meeting came the less certain such a cut became. Since the reason behind a reduction in quotas was to make room for the ramp up in Iraqi production, there was on the other hand no imminent action required, as we have to expect further delays in the reconstruction of the Iraqi oil industry.

The price for the barrel West Texas Intermediate peaked at USD 32.36 on the 11th of June and started eroding, as the market began to assess the OPEC decision not to reduce its quota. OPEC will meet again on the 31st of July and review its position according to the progress in Iraq. So far Iraq since the end of the war has exported a total of 9.5 million barrels of crude oil, which is far away from the daily pre war production of 2.5 million barrels.

We could see some more weakness in crude oil prices over the near term and we are recommend investors to take some profits in our recommended oil stocks ConocoPhillips and Exxon Mobil (XOM, $37.93, CSFB: Neutral)

3M Co. (MMM, $127.80, CSFB: Neutral) is asking the FDA for approval to market its drug Aldera as a therapy for superficial basal cell carcinoma, a common form of skin cancer, for which about 1 million cases are diagnosed in the US each year. 3M is trying to expand its range of healthcare products by extending the use of Aldera for different therapeutic areas and in developing compounds designed to stimulate the immune system.

The company is renowned for its Scotch-tape and Post-it note's, but its health division is its single largest business, generating $3.5 billion (3M total sales: $16 billion) in revenue with asthma inhalers and medical adhesives. 3M expects approval for the new application of Aldera in the middle of 2004. The company has not provided exact sales figures for each product, said revenue from Aldera exceeds $100 million. These figures would grow further. BUY.

Johnson Controls Inc. (JCI, $85.49, CSFB: Not rated) was awarded the contract to produce a voice activated hands-free system for using cellular phones in vehicles of DaimlerChrysler's US Chrysler unit. Johnson Controls will start the production of the device in early 2004. The system will be pre-installed by order and will cost USD 279.

Chrysler did not give any figures about the sales it expects form this system, which makes it hard to quantify the potential revenues for Johnson Controls. However it confirms Johnson Control's strong position in the automobile supplier business, especially in niche markets with strong growth potential.

Johnson Controls also sold its French spark-plug unit Eyquem, which it recognises as a non-core asset, to its German competitor Beru for an undisclosed amount. This unit is expected to generate sales of USD 23.5 million for this year.
We reiterate our buy recommendation on Johnson Controls.

European equities

The French drug maker Aventis SA (AVE_FP, EUR 48.38, CSFB: Outperform) and its rival Andrx Corp. (ADRX_US, $22.94, CSFB: Not rated) were turned down by an appeals court over the accusation that both companies improperly conspired to have delayed the market entry of generic versions of Hoechst AG's cardio-vascular drug Cardizem back in 1997.

Two years later Hoechst and Rhone-Poulenc SA merged to create Aventis. Hoechst agreed to pay USD 90 million to Andrx between 1998and 1999 in order to delay the marketing of a cheaper version of Cardizem. Cardizem reached peak sales of USD 810 million in 1998, before generic competition started to erode sales.

Both companies have settled lawsuits in this regard and will pay damages to the patients, insurer and wholesaler who were denied access to the cheaper version of the drug. The reason why the two companies continue to fight the decision by the appeals court is that there are still some smaller suits open. And the US Federal Trade Commission, which said that the Hoechst-Andrx agreement didn't delay the marketing of generic alternatives, has cleared the two companies. We are keeping an eye on the progress of this legal battle, but we do not expect any material effect on Aventis, for which we reiterate our buy rating.

The steel maker Arcelor SA (LOR_FP, EUR9.74, CSFB: Outperform) confirmed to the French newspaper 'Les Echos' its objective to achieve EUR 300 million in merger related synergies, from the merger between Usinor, Aceralia and Arbed by the end of this year, and of EUR 700 million by the end of 2006. The company according to 'Les Echos' has already achieved EUR230 by the end of March.

Arcelor's CEO in another report said that he expects to cut production by 10% in order to bolster prices. The company has already raised prices twice this year as it lowered output.
Steel prices are under pressure from cheap imports and from slow domestic demand.

However the market welcomed the news from Arcelor, sending the stock 2.14% higher on that day. The achievement in synergies also gives us a good level of confidence that Arcelor has reached the trough and should be bound for a recovery. We continue to see the stock as a long-term buy, which in addition pays an attractive dividend yield of 3.77%.

The Dutch phone company Koninklijke KPN NV (KPN_NA, EUR 5.74, CSFB: Outperform) is being sued for GBP 150 million (EUR 212.7 million) by Hutchison Whampoa Ltd. over non-compliance to an agreement regarding a joint venture between the two companies. Hutchison accuses KPN not to have paid its share of 1 billion GBP to the venture, Hutchison 3G U.K., as a board's request asked it to do so in March this year. The venture is owned to 65% by Hutchison Whampoa, to 20% by NTT DoCoMo Inc. and to 15% by KPN.

KPN claims that the board's request was not valid and refuses to comment the issue, as it believes that in fact Hutchison is in breach of the shareholders agreement and asks Hutchison the buy KPN's stake for 140% of its fair value. KPN bought a 15% stake in Hutchison 3G U.K for GBP 900 million after Hutchison acquired the license for the high-speed telecom networking service in 2000, but last year KPN wrote off EUR 1.17 billion of the stake value.

So far few details have been disclosed, as the court proceedings have just begun. And it is too early to exactly quantify the material impact of the lawsuits, but it gives the impression that KPN would seek somehow to find an exit from the unprofitable Hutchison 3G U.K venture, which we would see as a positive. The venture is fighting the strong competition from larger rival Vodafone. We maintain our buy on KPN.