View from City Road: A barrelful of confidence in oil

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RATHER like a gas flare sparking to life, the oil sector has begun to attract some much-needed attention. Shares in many of Britain's independent exploration companies have moved up smartly in recent weeks. A flurry of deals from second-line companies have revived interest from investors.

So much so that they have been piling into the shares of Enterprise Oil and Lasmo like there was no tomorrow. Helped by sustained overseas buying, both companies' stock has shot up by almost a quarter in just one month.

Even British Petroleum, saddled with financial problems and the trauma of its halved interim dividend, has managed to keep up ahead of the market's performance over the past month.

Among tiddlers, Clyde has gone up about 40 per cent and Monument, the quality play among the second liners, by about 15 per cent.

For those who moved into the sector near the bottom, this must feel like striking oil in the backyard. But oil shares are still well below the level they were just a year ago and the rally is likely to continue.

Not only has the hardening dollar relieved the pervasive gloom but it should also improve the industry's cashflow. In addition, the companies are knocking their asset portfolios into shape to improve efficiency.

The parallel with the mid-Eighties is unmistakable. The period after the oil price bottomed out at dollars 9 a barrel was followed by intense consolidation in the sector, partly through corporate takeovers.

This time, however, few companies - with some exceptions - have either the cash or the highly-rated paper to mount takeovers. As a result, the current shake- out is likely to focus more on asset swaps and joint ventures than bids. The irony is that valuing assets, hard at the best of times, is fiendishly difficult at present. Investors have long been disenchanted by oil companies' own valuation of what they hold below ground. Balance sheets may boast of massive oil reserves but that does not guarantee strong dividend flows.

But while UK investors may wait for the sector to respond to their new demands, US buyers have been snapping up stocks at bottom-of-the-barrel prices.

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