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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: Fadel, what macro trends have had the greatest impact on the integrated oils in 2001?

Mr. Gheit: Changes in oil and gas prices have less impact on the earnings and the stock performance of major oils. For example, despite record earnings in 2000 and second best ever earnings in 2001, major oil stocks managed an anemic gain of less than 2% in 2000 and a decline of almost 7% in 2001. BP lost almost 20% of its market value in 2000, and Royal Dutch had the same poor performance in 2001. The key factors to this group’s stock performance is operating efficiency, production growth and dividend growth. Despite their size, these companies have no pricing power and, therefore, only their ability to control their costs and replace their reserves while increasing production gives investors confidence in their outlook. Because of their shear size even a large oil or gas discovery usually has little or no impact on the stock price.

TWST: Fadel, what’s your pricing scenario?

Mr. Gheit: Barring US military strikes against Iraq, I think the market will fundamentally support crude oil prices in the low $20s. OPEC has managed once more to stem the decline in crude oil prices by cutting production and now the cartel is more interested in maximizing oil export revenues instead of gaining market share. OPEC targets the average price for its crude in the range of $24 to $28, which is approximately $26 to $30 for the US benchmark price of West Texas Intermediate (WTI) crude. OPEC, which is the world’s swing oil producer, has successfully adopted a market-driven production strategy that put the cartel back in control of the world oil market. Although quota violation continues, compliance, not cheating, is now the norm, not the exception. The reason for the change is simple: OPEC needs export revenues to support its ailing economies, feed, house, educate, and protect its growing population, or risk political unrest. So I think oil prices will probably average in the low $20s with speculation pushing them above the mid-$20s and weak demand or oversupply depressing them to the high teens — a far cry from the average price of $18 in the 1990s. The price will continue to fluctuate in a wide range because of the very complex nature of the industry and the impact of global politics and policies on supply and demand. I am more surprised at this unexpected surge in domestic natural gas prices. With natural gas storage still near record levels, one of the mildest winters on record (except for this recent cold spell), and weak industrial demand, I was expecting prices to fall below $2 per 1,000 cubic feet. But it appears that companies reduced their drilling activities when oil and gas prices were low, which accelerated the rate of production decline and higher than expected inventory draw. Higher crude oil prices also established a floor under natural gas prices based on the historical 15%-20% discount on energy content basis. Short coverage and the impact of the Enron debacle also helped gas prices. But barring a surge in demand caused by a strong economic recovery or very hot summer, and with companies increasing their drilling spending to take advantage of the high price gas, inventories will rise and prices will fall. Weather remains a critical factor in domestic natural gas prices.

TWST: Fadel, are there any names that might not be on your buy list today, but that you feel long term could prove promising for investors?

Mr. Gheit: For risk-averse investors with horizons longer than one year, we believe that both BP (NYSE:BP) and Exxon Mobil (NYSE:XOM) fit the bill. Among the E&P companies, we like Ocean Energy (NYSE:OEI) because of its upside exploration potential and unique business strategy. It has an attractive asset mix of 50-50 oil and gas in both production and reserve, with most of the gas in the US and most of the oil outside the US. The company is involved in several exploration joint ventures with larger companies, including a major project in West Africa with Exxon Mobil and several projects in the Gulf of Mexico with Kerr-McGee and Amerada Hess.

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.