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Oil Stocks Unfazed by Downgrades

Merrill and Morgan Stanley cool on big oil and the services sector, but the shares find buyers.

The prospect of a muted economic recovery has two analysts refining their ratings on oil stocks.

Ole Slorer, an analyst at Morgan Stanley, lowered his ratings on petroleum service providers

BJ Services



Smith International




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Cooper Cameron


to equal-weight from overweight, saying they have been relative outperformers in the market's recent pullback.

According to Slorer, industry fundamentals will probably be flat for the next nine months. "Until year-end, we see potential for vigorous rallies in the Philadelphia Stock Exchange Oil Service Index followed by periodic retracements," he said. "We would advise to buy on the dips."

The analyst reiterated his opinion that the service providers are core holdings and that they offer the possibility of a significant return, but he said the overweight category is reserved for stocks with the best risk/reward at current valuations. Slorer raised his recommendation on offshore driller

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to equal-weight from underweight.

In a separate note, Steven Pfeifer, an analyst at Merrill Lynch, lowered his price targets on oil producers


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to $97 from $115;


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to $42 from $50; and

Phillips Petroleum


to $69 from $90, to reflect lower stock market valuations.

"Because our price objectives for the integrated oil shares are set relative to the market, our price objectives decline as general equity values move to a lower valuation," Pfeifer wrote in his research note.

In recent quarters, oil producer profits were squeezed because of weak demand for heating oil, as a result of warmer weather, especially in Europe, and depressed demand for gasoline after Sept. 11.

On the upside, Pfeifer said "refining and marketing margins, which hit 10-year lows during the first quarter, began a gradual recovery in the second quarter that has continued to the current quarter."

Neither of the research notes were hurting the companies the analysts named, as all were trading higher Friday afternoon.

The Philadelphia Oil Service Sector Index was recently gaining 4.2%, and the American Stock Exchange Oil & Gas Index was up 1.2%. Since the start of the year, the Philadelphia measure has fallen 8.6%, while the Amex index has lost 7.4%. The

S&P 500

has dropped 21.6% over the same period.