Soaring commodity prices have begun to propel earnings higher for the majority of oil and gas stocks. Yet much to the dismay of energy executives and sellside analysts, many institutions remain cautiously on the sidelines, at least compared with their prior interest in energy. In fact, earlier this year, most of the top 20 institutional investors (including household names such as Janus and Putnam) owned fewer energy stocks than they did in 1997. This is ironic because industry conditions today are far better than they were in 1997, the last time companies experienced such strong cash flows and earnings. The U.S. rig count finally topped the 1,000 mark at 1,019 the week before Labor Day, a level not seen since 1997. Perhaps after the results of the third quarter are revealed, more institutions will come back to energy. A recent report by Houston-based Simmons & Co. International analyzes broad trends in institutional ownership in five categories: major oils/integrateds, E&P, oil service, diversified energy and refiners. Simmons studied 13(f) filings made with the Securities and Exchange Commission for the quarter ended March 31, 2000. The 13(f) institutions are those having discretionary power over at least $100 million. Some 45 days after the end of each quarter they must disclose their stockholdings to the SEC. In every energy subsector, stock prices follow in the direction of 13(f) buying and selling activity. "Most of the top 20 institutions own less energy today than they did in 1997," Simmons reports. "Anecdotally, this is evidence that earnings, not commodity prices, are the driver of ownership during energy up-cycles. In 1997, oil prices were around $20 per barrel and drifting lower-but earnings were growing strongly. Today oil prices are higher...but earnings have only begun to recover. "We believe institutional ownership will increase from current levels, following earnings higher...." Data show that the oil-service sector had the most overweighting by these investors at March 31. Indeed, 13(f) investors owned 70% of all the oil-service industry shares outstanding, which is approaching the level last seen in 1997. On a percentage basis, however, the oil service sector makes up only 1.1% of the total portfolio held by the 10 biggest 13(f) investors. For example, at March 31, Fidelity held more than $10 billion in 43 separate oil-service stocks-yet that dollar total represents only 1.6% of its entire $624-billion portfolio. The majors were significantly underweighted by most institutions, Simmons found. The investment-banking firm says this is the next energy subsector that investors should migrate into, because only the largest stocks offer enough liquidity to accommodate increased trading by large institutions. The report says that Janus, AIM and AXA Financial (formerly known as The Equitable), are the largest institutions that are noticeably underweighted in the energy industry, with just 2.5%, 3.3% and 3% of their portfolios in energy, respectively. That compares with the energy weighting in the S&P 500, which is currently at 7%. Fidelity is among the largest holders in the energy subsector, but even so, it ranks 12th among the top 20 institutions with a weighting of 6.1%-still below the S&P 500 energy weighting. Simmons found that oil service was the most overweighted sector at March 31, yet only 11 of the top 100 holders of those stocks had a greater than 5% position, indicating further caution. "This contrasts with the peak of the last cycle (September 1997) when almost 30% of the top 100 holders had positions of 5% or greater." -Leslie Haines