Riding the gushers, and riding out the dry spells

Soft-spoken and Ivy League educated, oil-sector mutual-fund manager Michael Hoover doesn't come across as a roughneck.

But while tending the "wellhead" for the Excelsior Energy & Natural Resources Fund, Mr. Hoover must perform all the nimble lunges and chain flailings of the grimiest oil rig worker. Otherwise, he might instantly lose a few digits - in terms of portfolio profit, that is - and miss a gusher that would pay off for weeks.

It's labor Hoover has done well. During one of the most hectic and harrowing three-year period for the oil industry in decades, Hoover has outpaced his peers, tapping a 15.5 percent average annual gain. (See chart, right.)

Like a roughneck, Hoover thrives by maintaining balance while making bold moves. For balance, he tries to evenly diversify across many types of companies - major integrated oil, independent producers, pipeline, oil services, and natural resources.

With such a broad-based platform, Hoover wins much of his extraordinary return by timing the ups-and-downs in the highly cyclical oil business.

When the oil price looks as if it's about to rise, he shifts into volatile oil service companies like Schlumberger Ltd. When it's about to fall, he pulls back to stable, high-dividend major integrated oil producers like Royal Dutch Petroleum Co.

"We use cyclicality to our advantage," says Hoover. "If stock prices are hurt, we buy - that shift gives you the edge."

For example, as oil and other commodity prices rose in 1996, Hoover bought shares in two oil-service firms, Ocean Energy Inc. and United Meridian Corp. For the year, the stocks ranked among the Top 10 on the New York Stock Exchange, and Hoover's fund returned 38 percent.

As the price of oil last year sank to its lowest level in more than two decades, Hoover shifted into integrated producers.

Then in late February, because of hints of a production cut agreement by the Organization of Petroleum Exporting Countries (OPEC), Hoover began to buy back oil-service companies. His fund, riding a nearly 40 percent jump in the oil price since March, is up more than 27 percent so far this year.

Hoover thinks the sector will continue its recovery and high-octane returns. Demand is rising as the world economy shows signs of renewal, especially in Asia. That region in recent decades has accounted for half of the growth in world energy demand.

OPEC is likely to hold for at least a year to a recent supply cut agreement. That would sustain the oil price between $16 and $19 per barrel, or well above the $12 per barrel bottom of last year.

Moreover, oil companies for years have been wringing out inefficiency and excess capacity through mergers, outsourcing, and innovation.

"These companies are showing strong capital discipline and that is making them more efficient," he says. A sustained recovery of the oil price will jolt the earnings of the highly streamlined firms.

Finally, continued flow of investor dollars into oil companies should give an unusually strong boost because of the firms' comparatively small-market capitalizations.

"The energy sector should do well," Hoover says, "relative to the general market, energy and natural-resources stocks should continue to outperform."

"Peak earnings will be higher than in the past, but we're not losing sight of the fact that these companies are in mature industries that track commodities and are highly cyclical," he says.

Hoover's enthusiasm for "black gold" doesn't spill over onto the real thing. Gold, the metal, will remain around its current 20-year level of $270 an ounce as long as inflation stays low and confidence in the US Federal Reserve and political stability remains high, he says. Hoover holds just one gold producer, Newmont Mining Corp.

Still, Hoover sees promising plays beyond the shadow of Big Oil. One of his favorites is Southdown Inc., a Texas-based maker and distributor of cement. Hoover reckons the company will flourish because of a nationwide building boom and billions of dollars in federal spending on interstate highway repair. US companies today meet just 80 percent of the country's demand for cement.

Moreover, Stillwater Mining Co. shines as an efficient producer of platinum and palladium, metals vital for the catalytic converters needed by the booming auto industry, Hoover says.

But if Hoover were to choose one slice of the energy and natural-resources sector, it would be the major integrated oil producers. "They are sort of undiscovered in the sense of being strong performers," says Hoover.

Big Oil is constantly streamlining and adapting, boosting dividends or repurchasing stock to maintain shareholder profit. "They seem boring, mature companies, but on a total return basis, they tend to do very well," he says.

His favorite: Royal Dutch. "It has arguably the best asset base among the last major oil companies yet to restructure."

Excelsior Energy & Natural Resources Fund Top fund holdings Company Percentage of portfolio

Royal Dutch Petro NY ADR 5.8% Ocean Energy 5.7 Mobil 5.3 BP Amoco ADR 5.2 Williams Companies 4.9 Chevron 4.5 Exxon 4.1 BJ Svcs 4.1 Anadarko Petro 4.0 Texaco 4.0

Source: Morningstar as of 3/31/99