Kerry E. Carter
Analyst
Simmons & Company International
(713) 236-9999
----- Forwarded by Kerry Carter/SCI on 11/26/01 03:02 PM -----
                                                                                            
                    Dan Pickering                                                           
                                         To:     Everyone                                   
                    11/26/01             cc:                                                
                    08:30 AM             Subject:     Thoughts on the world of energy (OSX  
                                         $77, XNG $183, XOI 496)                            
                                                                                            



This went to our institutional clients this morning....DRP

Dan Pickering
Simmons & Company International
700 Louisiana, Suite 5000
Houston, TX 77002
phone:  (713) 223-7861
fax:  (713) 223-7845
email:  dpickering@simmonsco-intl.com
----- Forwarded by Dan Pickering/SCI on 11/26/01 08:33 AM -----
                                                                                            
                    Dan Pickering                                                           
                                         To:     Sales Trading                              
                    11/26/01             cc:                                                
                    08:30 AM             Subject:     Thoughts on the world of energy (OSX  
                                         $77, XNG $183, XOI 496)                            
                                                                                            



SUMMARY:  At or near inflection points, stock calls are all about the big
picture.  This is particularly true of cyclicals like energy.  Although
execution is always important for differentiating between companies,
company specifics mean relatively little to investors right now compared to
the big picture.  We believe the broad market and energy stocks
(particularly oil and gas stocks) currently discount an economic recovery
in 2H'02 and that commodity prices will not crater and will begin to
improve with economic conditions.  Valuation for energy stocks is neither
particularly cheap nor expensive at this point in the cycle.  Hard to hate
them; hard to love them.  15% moves in either direction would create more
interest from us to buy or to sell.  Would call news over the weekend
(particularly Russian) as negative, especially in light of the light volume
rally on Friday, which has put the stocks ahead of where they should be on
a trading basis.

THE BIG PICTURE:  Crude oil fundamentals and pricing are appropriately the
current focus of investors and this has been driving energy stocks on a
trading basis.  We aren't going to be disappointed by the amount of news
flow, as many issues will be relatively quick to play out within the next
several months.

   Russia:  Recent news is negative.  Promised reduction in output from
   30k/day to 50k/day is a disappointment and makes future OPEC cuts and
   compliance more risky.  Volume reductions will be revisited on December
   10th, but near-term damage has been done.  Conclusion:  downward
   pressure.
   Iraq:  Nothing is obvious about Iraq.  Sanctions renewal is coming up in
   just a few weeks.  News is surprisingly quiet on this front - with
   pricing mechanism complaints the only recent commentary from Iraqi
   government.  Intriguing that Russia scuttled the US/Britain calls for
   smart sanctions last renewal period, but now have much more to gain by
   encouraging events that prompt Iraq to leave the export market, boost
   crude prices and help Russia win on both volume and price.  However,
   Russian companies are the big winners in rejuvenating Iraqi oilfields,
   so do they want to alienate Iraq here?  A blurb over the weekend that
   Iraq caught some Iranian plotters against Saddam Hussein, which adds to
   overall confusion on the Iraqi situation.  Conclusion: Upside pressure.
   War In Afghanistan:  Current successes are good for the economy and
   crude demand, but also reduces the near-term risk of supply disruptions.
   War premium coming out of crude.  Conclusion:  Downward pressure.
   Economy/Energy Fundamentals:  Recent US economic datapoints appear to be
   modestly better than experts have predicted.  Europe as bad as expected.
   Japan remains dismal.  Lower crude and gasoline prices are nice stimulus
   for disposable income (just in time for Xmas shopping).  However, even
   if shoppers are mobbing Wal Mart, worldwide energy demand still appears
   to be falling on the margin.  Crude inventories rising at a brisk pace
   vs. historical norms for this time of year and more OPEC (and non-OPEC)
   cuts and compliance are needed to maintain a price in the high-teens/low
   $20/barrel level.  Conclusion:  Near-term downside pressure but glimmers
   of hope via economy.
   US/Europe Political Issues:  You have to assume that US and European
   governments care more about reasonably priced (or cheap) crude oil to
   stimulate the economy than anything else - but also don't want economic
   chaos in the Middle East.  We continue to gather intelligence from our
   Washington contacts that the US Strategic Petroleum Reserve will be used
   to support prices, but not until WTI crude is in the mid-teens.
   Conclusion:  Modest downward pressure.
   Israel/Palestine:  More violence over the long weekend.  Still no signs
   that OPEC countries taking a significant stance on this issue.  Watch
   the rhetoric - that will come before any action on OPEC's part.
   Conclusion:  Neutral with more likely upside pressure than downside
   pressure.
   Enron Situation:  If ENE craters, the impact on energy markets is
   unquantified, but certainly significant.  Who knows about what ripple
   effects could (and are) occurring.  Conclusion:  ????
   Natural Gas:  Warm weather and weak industrial demand are a bad combo.
   Thank your lucky stars that it was the Wednesday before Thanksgiving
   when last week's ugly AGA gas inventory numbers were reported.  Falling
   gas rigcount is the only near term savior and that is occurring.  Gas
   problems will work themselves out faster than crude and hence our bias
   toward gassy stocks - note that the street has also figured this out as
   the gassy names have had the best performance off the bottom.
   Conclusion:  Stinky and everyone knows it.  Trading influence only.
   Investors are really watching crude oil for the next big move (in either
   direction) for the stocks.

STOCKS:   Overall, incorporating fundamentals, sentiment and valuation, the
sector is closer to a buy than a sell.   In June 2001, we worried about 3
shoes that could drop as a result of the soft economy.  Nat gas prices (and
sentiment).  Crude oil prices (and sentiment).  Earnings expectations.  All
three have happened and it will take a lot of bad news on the items
discussed above to take energy stocks to new lows (OSX <$59, XNG <$167).
That doesn't imply a huge run to new highs either.  The problems in OPEC
have shaken investor confidence and therefore we think that energy will lag
in a rally of the cyclicals.  It has become boring to write the concluding
paragraphs of these notes as the conclusion has not changed much.  Big
investors should go against the grain and buy the hard down moves.  Small
investors should be more valuation sensitive on entry points.





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