Major oil companies clearly benefited in 1999 from the crude-oil price rebound. But the stock market's belief that crude prices will drop dramatically later this year is undermining their stock prices now. The 15 publicly traded majors tracked by Petroleum Finance Week, a Hart Publications product, pushed their full-year earnings, before special items, 24.1% higher on revenues that rose 12.7% year-to-year. The improvement over 1998 was even more dramatic upstream. Operating income of the 14 companies with E&P operations jumped 96.5% on combined oil and gas production that decreased 1.5% from 1998. "1999 was a turnaround year," declared analyst Al Silber of Herzog, Heine, Geduld Inc. in New York. "The majors started off very poorly and finished quite strong. The divergence between the beginning and the end of the year was as dramatic as I can recall." "It was a very powerful trend on E&P profitability and a relatively negative one downstream," added George J. Gaspar of Robert W. Baird & Co. Inc. in Milwaukee. "But I expect refining and marketing to get going during the second quarter, while prices should retreat in the second half. No one expects $30 oil to last very long." Michael Mayer, who follows the majors for Schroder & Co. Inc. in San Francisco, thinks that the stock market is ignoring an excellent oil industry outlook. He expects world oil markets to require about 2 million barrels per day more from OPEC to keep supply and demand in balance and prevent additional liquidation of inventories. "This will put OPEC at 90% capacity, a level that has historically supported $21 to $23 per barrel oil," he maintained. "Importantly, the overhang of embargoed Iraqi oil capacity essentially will be eliminated by the end of this year, removing a cloud that has hung over oil markets and oil stocks for nine years." Silber suggested that the stock market may be going astray by confusing crude-oil price assumptions that majors make to help establish budgets with actual forecasts. He noted that when Chevron officials addressed New York oil analysts in early 2000, they indicated that the San Francisco multinational assumed a $17 average crude price for 2001 and an $18 price for 2002. Unocal Corp., which has reconstituted itself as an independent producer, outlined similar oil price assumptions in its presentation the next day, while Texaco Inc. appeared somewhat more optimistic. "What investors and reporters took away from these meetings was that these figures were predictions, not assumptions," said Silber. "So the majors unwittingly have let the genie out of the bottle. Oil prices aren't likely to go back to those levels soon. The supply-demand balance has been adjusted so that a few large exporters are better able to manipulate the price better than they could 10 or even 20 years ago. The logic of their not allowing prices to slide back to $17 or $18 is compelling." The majors' conservative oil price assumptions are intentional, according to Gaspar. "Their exploration and development budgets are very cautious, about 6% to 8% higher. I think that the actual numbers possibly could be twice that amount," he indicated. "There has been very little progress across the board in increasing oil and gas deliverability. The majors have made several domestic deepwater discoveries. But there is a tremendous lag of about 18 months in bringing these finds on stream. We already are one to two years behind schedule because prices were so depressed late in 1998 and early last year." Mayer said that the majors are almost as inexpensive now versus the market as they were in February 1999, when crude prices hit bottom. The group rallied 30% from that point in 12 weeks as oil prices soared from $12 to $19 per barrel, he continued. "However, since the end of April [1999], the major oils have dropped 13%, despite an additional 42% increase in oil prices," said Mayer. "The paradox is that the market has ignored the dramatic improvement in oil prices [and in fact is avoiding the sector in anticipation of a downward correction]. At the same time, it has penalized valuations for the squeeze in refining margins caused by the surge in oil prices." -Nick Snow