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Friday, October 06, 2006

Industry Contrasts: Exxon and Conoco (XOM)(COP)(CVX)

It would be easy to assume that the big oil companies would trade fairly close to one another with the price of oil moving them up and down as the months pass. Based on that theory, oil company stocks should be down recently as oil drops below $60 a barrel. For the most part, the theory is sound. Exxon's stock, which was trading above $67.50 four days ago, dropped to below $65 three days later. It has since recovered at OPEC issued statements that its members may cut production.

But, the behavior of Exxon's stock compared with competitor Conoco paints a different picture. Over the last three months, Conoco has dropped 15%, while Exxon has moved up 6% despite the drop in oil prices.

Exxon's management is widely admired, and its scale, as the largest oil company, is viewed as an operational and financial benefit. In a recent report from Morningstar, the analyst was effusive in his praise for the firm: "We think ExxonMobil's massive scale and unrelenting pursuit of operational efficiency create a competitive advantage that the firm can bank on, no matter what path energy prices take."

The knock against Conoco may be a fair one. Much of its production and reserves are in mature markets like the US and Europe where the oil fields are mature. Once again, Morningstar weighs in on prospects by saying the the production declines in these regions are not helping the company.

The fact that the largest new reserve found in the Western hemisphere, the new Gulf of Mexico Jack 2 well, was drilled by a group lead by Conoco rival Chevron, appears to put COP into an even tougher box. Indeed, Chevron's stock has come very close to keeping pace with Exxon's over the last 90 days. With Exxon's scale and Chevron's new Gulf capacity, Conoco may be the guys left out.

Douglas A. McIntyre can be reached at He does not own securities in companies the he writes about.

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