Not since the Gulf War has America seen oil prices of $35 dollars a barrel, last week's high. And the prospect of stiff prices for heating oil this winter is already giving us a chill. Not surprisingly, share prices for the big three oil companies, ExxonMobil, BP Amoco, and Royal Dutch, have risen accordingly. If you missed Big Oil's runup, consider Not So Big Oil: companies such as Conoco and USX Marathon have been relatively ignored by investors, but they're turning analysts' heads. "These are companies whose profits have exploded while their share prices remain dormant," says Ed Maran of A.G. Edwards. While a company like ExxonMobil may be stronger in terms of distribution and product diversification, "a barrel of oil is a barrel of oil--no matter who owns it," says Paul Cheng of Lehman Brothers. He also believes that the current differential of 40% to 50% between mid-size and big oil is too large to justify. "With today's price levels and huge valuation gaps," he says, "mid-size oil companies offer a far better value." For example, based on Lehman's earnings estimates for 2001, Marathon's price-to-earnings ratio is less than half that of ExxonMobil. Furthermore, Cheng argues that when crude prices drop to more sustainable levels, companies like Marathon and Conoco stand to benefit most from their downstream refining and marketing operations. So while the price at the pump may hurt, there's still a way to buy oil at a discount.
--By Carole Buia