Merrill Lynch Analyst Says Oil Prices to Hold at $17 to $18 a Barrel/remain in High Teens for 2-3 Years

By L. D. Barney | THE JOURNAL RECORD, May 22, 1986 | Go to article overview

Merrill Lynch Analyst Says Oil Prices to Hold at $17 to $18 a Barrel/remain in High Teens for 2-3 Years


L. D. Barney, THE JOURNAL RECORD


late in 1986 and remain in the teens another two to three years, pr edicts Warren M. Shimmerlik, senior oil analyst for Merrill Lynch, Pierce, Fenner & Smith Inc.

At that price "non-OPEC production will crater" and the domestic oil industry will "erode" because it will be unable to generate the cash flow it needs, according to Shimmerlik, in Oklahoma City Wednesday for U.S. Small Business Week, 1986.

Saudi Arabia will regain control of world oil prices, he said.

The bottom-line is that oil company stocks are not good investments - even in the long-term because most of them are being traded at a value reflecting $20 oil, Shimmerlik said.

Saudi Arabia will probably keep oil below $20 a barrel, he added.

Major companies that are not highly leveraged, have low production costs and do not pay too high a dividend will survive, Shimmerlik said, but he warned that independent producers with a lot ofbank debt will probably fail.

"This is not a particularly good environment for an oil industry that built itself on $25 oil," he said. "A lot of independents will be gone."

"What's happening to Oklahoma is a function of no control on price," he said. Two-thirds of all investments by oil companies in the last 15 years were during the past five years when finding costs were high.

Value was not returned for the money invested when prices were rising.

"Now," he said, "if prices rise more slowly it will be good for everybody involved."

However, Shimmerlik offered a ray of hope for Oklahoma producers with natural gas reserves - but only those with little debt.

"In a way gas is a sleeper right now," he said, "because everyone is so focused on oil. The whole idea of being in gas is attractive."

Strategic investments in companies with more gas reserves than oil and low debt would be attractive, he said.

"The success in the industry will be in gas," he said. "Oil is not going to be the name of the game in the U.S."

There is little domestic oil left to be discovered expect in deep offshore waters and Alaska and those areas are marginal because of high finding and production costs, he said.

The surplus of gas deliverability is shrinking and demand will likely increase, especially if the Fuel Use Act is repealed so gas can be used in industry and the generation of electricity.

Another key will be open transportation through interstate pipelines, Shimmerlik said.

"If markets can be opened for head to head negotiations between producers and industry demand will increase," he said. Pipelines represent a third-party interest that interfere with those negotiations.

On other matters Shimmerlik said:

- Lowered prices have created an excellent opportunity for those who are not highly leveraged and have cash to buy producing oil and gas properties. …

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