Don't give up on oil stocks yet! (page 1 of 4)

US equities

Crude oil declined sharply over the last week, leading to some profit taking in integrated oil company stocks.

Share price of oil companies such as our recommendations ConocoPhillips (COP, $56.08, CSFB: Outperform) and Exxon Mobil Corp (XOM, $37.97, CSFB: Neutral) saw strong performance during the month of August, so it is not surprising that investors are starting to lock in their gains as crude oil weakens.

The West Texas Intermediate fell to USD 28.88 per barrel as of Friday, from USD 31.57 at the end of August. News of an improved supply situation in the US with inventories rising and crude oil exports form Iraq slowly starting to pick up dragged crude oil prices down. The US Energy Department reported an unexpected 1.8 million barrel rise in US oil inventories to 280.4 million in the week ended August 29.

We continue to see a favourable environment for the oil industry, as crude oil prices around USD 28 still leave oil companies with solid operating margins.

This environment should continue to be favourable for the upstream part of the industry, the drilling companies like Noble Corp (NE, $35.40, CSFB: Neutral) and the service companies like Halliburton Co (HAL, $24.50, CSFB: Outperform), while integrated oil companies could start seeing a weaker environment being priced into the shares.

Hence we recommend setting protective sell levels for ConocoPhillips at USD 55, in order to protect the gains since our recommendation at USD 51.98 and for Exxon Mobil we increase the stop-loss level to USD 37, from the previous USD 33.

Bank of America Corp. (BAC, $76.15, CSFB: Outperform) stock price came under pressure, after New York Attorney General Eliot Spitzer said BAC allowed Canary Capital Partners LLC, a hedge fund, to trade shares of the company's Nations Funds after hours in return for additional investments.

We see the current weakness in BAC stock price as an opportunity to invest, as on the operating side, Bank of America is doing well. The bank has added 560,000 net new checking accounts year-to-date and is on pace to achieve its 2003 goal of one million new checking accounts (source: CSFB). Like the entire sector, rising mortgage rates pressured stock price, but we believe the increase in securities underwriting and asset management would support stock price.

A 25% increase in quarterly common stock dividend to $0.80 per share has been announced and will be effective starting in September 2003 (source: CSFB). The stock offers an indicative gross dividend yield of 4.20%. Valuations are attractive, and with current P/E of 13x, in-line with the banking sector. Dividend Discount Model gives a theoretical price of $95. Its move into investment banking should also contribute to the bottom line.

For aggressive investors, the current stock price weakness offers an opportunity to invest in Bank of America. An investment in the stock requires a tight discipline of taking profit and cutting loss.

The computer chip maker Intel Corp. (INTC, $28.71, CSFB: Not rated) said that it expects revenues for the current third quarter to be between $7.6-7.8 billion (up from $6.82 billion in Q2), at the top end of the range of $7.3-7.8 billion the company gave during its second quarter earnings report. At that time the company CEO Bryant gave a cautious statement, saying that it was too early to predict a recovery.

The improvement though seems to be limited to the computers and servers, as Intel also said that sales of communication gear remain soft.