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rl W—-a–l-s-tIoncn–&—-C–o-. MEMBERS NEw rORK STOCK EXCHANGE AND OTHER LEADING STOCK AND' COMMODITV EXCHANGES NEW YORK PHILADELPHIA LOS ANGELES SAN FRANCISCO LUGANO (Sw;t,Id) OFFICES COAST TO COAST COfNECTf; BY DIRECT PRIVATE WIRE SYSTEM TABEll'S MARKET LEnER March 29, 1956 Among the leading stocks in the market rise which began last January have been the Oils, with leading equities having posted gains up to 20 from 1956 lows. This poses a number of questions for the investor committed to oil securities. What has caused this drastically improved market action Can it be expected to continue And are oil stocks still good buys at or arcund current levels The cause of the rise is not overly difficult to determine. Oil 'has, since its inceptJon, been a growth industry. Indeed, accordinr to Chase lianha ttan Bank economists, -,- US. oil-consump t'fon, has', over/the – 23 grown at an annual rate of 5.8. Free foreign demand has recently grown at the even more astounding rate of 11 annually and the 1954-55 increase was even more startling with U.S. consumption posting close to an 8 increase. Percentage growth in consumption may not be so striking in 1956, but most economists expect the long term growth trend to continue. The recent rise' in oil stock prices has been based then, at least to some extent on fun- damentals. As to the probable continuance of the recent rise, most oils have, during recent months, built up conSiderable accumulation patterns which, in most cases, appear to indicate higher levels. In many stocks good tech- nical support is found just below present levels. While, in certain cases, near term correction or consolidation appears necessary, weakness could profitably be used to add to commitments. It would seem, therefore, that profitable opportunities can still be found in some oil securities, for the reasons mentioned above, plus a number of others. A general rise in the price of crude oil, considered highly probable by mfmy authorities, would add to potential earning power of the oil companies. hnother industry characteristic which points to , 'long term '-growth' 1s ctl1e increasing use—of p-e-tr-oc'hemicals. factors taken together tend to create a.favorable long term investment picture for the industry. What stocks, then, offer the best potential It is important for the investor to differentiate between the many different types of compa-nies within-the industry. To do this, two factors must be taken into consideration – (1) the extent of the company's production compared with its refining and marketing operations and (2) the location of its reserves. A short glance at price-earnings ratios will demonstrate the impor- tance of the production factor. J, company like Amerada, exclusively a producer, or Continental, which produces more oil than it refines, tends to sell at a much higher pie ratiO, (often more than 20 times) than a company heavily committed to refining and marketing. Among the for this tendency are the favorable tax treatment given to producing com- panies by means of the depletion allowance, the heavy fixed costs invol- ved in the building of huge refineries, and the heavy competition which obtains in field. These and other factors comtine to create a higher price-earnings ratio for most producers. second factor of importance is tne.location of reserves. Present middle-East reserves amount to just short barrels-er'f oil — or roughly three times present U.S. reserves. Furthermore, middle-East re- serves are in most cases easier of recovery and closer to foreign markets which are expanding at a swifter rate than U.S. markets. These favorable factors tend to offset the danger of losing middle-East reserves due to political development and explain the premium which has been commanded by the international oil companies, such as Standard Oil of New Jersey, Texas Company, etc. market letter IS not. anrlunder no rs to be conatrued … an otrt'l' to II or .. 6Ohdtabon to bUT any I&eeluitte8 rderl't.'d to hereIn The n'lformatlolt contame.i hereIn 19 not as to aeuracy or eomplet.enesa and the farnishmg is not. and under no eU'eum!!ltanee5 IS ttl .'\, a repregentatlon by Waltt,om Ii Co lnl' All CIprr.l'lLons of opinIon are to dlange- without nabet. WaJ..tnn Ii C(I.., Ine. or any Ortlcer, DIrector or St.oekhnlrler thereof. rna,. have an Int..re\t In the !lUtille'!!l mf!ntlOned herem Thl. market letter b lDunded and meTel,. aJ!I .. general, mformal commentary on day to day .market news and not a complete analYSIS Additional ,ntormauon 'lJIth rnped. to aD,. .untles referred to bll!reln WIll bot furnbhed upon request. —– – – – WN 301 -2- If the above-mentioned considerations are taken into account, suitfrble purchases of all types may be found; producers, integrated companies, refiners, domestic and international oils. Reviewed below are a few oil equities which should commend themselves to the investor, with varying appreciation potentialities. RICHFIELD OIL (80 ), which would seem to be worth close to its present price based on indicated earning power alone, appears to have in- terestrng speculative potential due to exploratory work being done in the middle-East. -Together with CITIES SERVICE (68 ), Richfield has taken a 30,000 square-mile concession in the Province of Dhofar. Joint ventures with Cities ServicE; are -815'0 1reing- under'l5ake-rl varying interests are held in a large Egyptian concession. It is thus highly probable that future developments may uncover reserves of major- importance to while defensive value is provided by good cur- rent earnings,-an 7.75 for 1956. —.,——' The long-term technical projection on the is 150 with an in- termediate term 110. There is good support at 75-70. Cities Service, which first entered our recommended list at 38, wll, of course, also be in a position to benefit from any possible joint concession discoveries. Objective from a technical point of view is 85. ATLANTIC REFINING (41 ) and SINCLAIR OIL (65 ) are two companies- with roughly analogous situations. Both appear cheap in relation to earn- ings and to other oils, ostensibly because of weak reserve pictures and- heavy marketing competition. Both these companies are embarking on for- ward-looking programs to improve the marketing picture and increase oil reserves. Indicative of this is Atlantic's recent purchase of the assets- of Houston Oil. Since this purchase is being financed by outside institu- tions with repayment as the oil is taken out of the ground, Atlantic is – ac q-ulrlng -large future tp sive action of this type can be expected to improve the operating picture on both Atlantic and Sinclair. Atlantic has held in the 40-35 range for over a year with the upside penetration indicating a possible 60. There is good support just under cur-rent levels. Long term indication on Sincla-ir is 89 with support at 60-58. AMERADA PETROLEUM (119) has long enjoyed a premier record among oil producers, due principally to its spectacular discoveries in the WillistonBasin and in Sturgeon Lake in Canada. Due to the fact that intangible dril- ling costs are charged directly against earnings instead of capitalized, earnings tend to be somewhat understated and are therefore capitalized at a high ratio. Based on the record and on earnings improvement foreseen,the shares still appear to be fairly valued. Long term indication is 150- 160 with possible higher levels as pattern broadens. Support at 110. CHICAGO CORP. (25 ) has an excellent technical pattern with an ob- jective of 44. There is support just under the current market. Chicago- is a producer on balance with an excellent reserve picture and good ex- ploration potentialities.Thelarger part natural- – gas and ,the company will benefit from growth in this field also. 1956 should approach 2.25 with cash flow double this figure. NOTE Edmund W. Tabell is still on vacation in Florida. He will return to New York on Monday, April 9th. ANTHONY W. TABELL WALSTON & CO.INC.