E-mail this article Printer-Friendly

An investor’s map of three hot spots in the oil world

Not all energy stocks are out of gas. A U.S. advisory points to three countries pumping up production — and to four stocks that will benefit.

Two years ago they released a movie about early oil prospectors called There Will Be Blood.

Today they could follow that up with But There Won’t Be Any Money.

Energy stocks have not held out great prospects for investors for quite a while now (it’s been nine months since crude oil hit $147 a barrel).

It was a one-two punch. Crude oil prices fell, and then the credit market unravelled. Not the optimum conditions for producing energy.

But production hasn’t stopped altogether, of course. And there are three places in the world where oil companies are drilling away as if the price of crude were gushing through the roof.

Four stocks are bound to reap the biggest benefits from this budding bonanza, says one of America’s leading advisories, Personal Finance. We get the full story from the editor, Mr. Elliott H. Gue.

Topping $60 a barrel

The fall in oil production has had a sort of domino effect. To try and revive the price of oil, OPEC cut production by more than 4 million barrels a day (bbld/d). They cancelled projects that would have added over 2.2 million bbl/d to global production.

And it’s even worse in some places outside the OPEC circle. Like Russia. Producers have scaled back so sharply that some experts think Russia could see output decline by more than 10 per cent a year.

“These rapid supply cuts have put a floor under oil,” says Mr. Gue. “I expect to see oil prices top $60 by the end of this summer and $90 by early 2010.” (With oil moving close to $50, this does not seem to be an unreasonable assumption.)

And while oil production is mostly dragging its feet around the globe, there are three notable exceptions.

Taking long-term views

The three places where they’re aiming to make more oil come a-bubblin’ out of the ground (or the ocean) are Brazil, Mexico and Iraq.

All are taking long-term views, says this editor, spending money to ensure that they’re first in line with supplies for the next oil price run-up.

He also cites his colleague, Mr. Yannis Mostrous who asserts that Chinese demand for oil is bound to rise rapidly in the coming years. In fact, China is lending billions of dollars to Brazil and Russia in order to guarantee itself a steady stream of oil.

“Our four plays centered on these energy markets will see growth even if oil prices hover around current levels,” says Mr. Gue. “And when prices do take off, all are well-placed to profit from the ensuing boom.”

Deep in the ocean

The final frontier of oil exploration is out at sea. Deep in the ocean, there are vast oil fields still being discovered — none more vast than those off the coast of Brazil. A series of discoveries has been announced over the past year and a half in the Santos Basin.

The company that gets to bring up all that oil is Petrobas (NYSE-PBR), the 55 per cent state-owned national oil company. The Tupi field, whose discovery was announced in 2007, is the most famous to date.

It’s 2000 metres (1.25 miles) down and 7000 metres wide, a straight horizontal block. It won’t be easy to exploit (it’s under a two-mile layer of salt), but Petrobas is putting $175 billion into the task over the next four years. And China has lent them $10 billion for the job.

Tupi “is just the tip of the proverbial iceberg,” says Mr. Gue. As Petrobas announces drill results from other exploration blocks in the Santos basin, the shares could enjoy a rally. Buy under $40, he says. The shares are currently at $33.75 and have been trending upward.

There will be rigs

There are two other companies that get to join in the fun in the Santos Basin. Britain’s BG Group (LSE-BG.L; OTC-BRGYY) will help Petrobas explore many of the most promising blocks in the Santos Basin.

It also has a big share in the global liquefied gas (LNG) market, exporting gas from Africa to nations in the Atlantic basin and Asia. It could also find willing buyers in Europe who are not all that happy about relying on Russia for their supplies. BG is a buy under $85, and sits at $79.75.

Of course, there will be rigs as well. Some very sophisticated equipment will be needed for this deepwater drilling and National Oilwell Varco (NYSE-NOV) has the advanced rig technology to deliver it. It doesn’t supply rigs, but it does sell cranes, pipe handling equipment, pumps, deepwater mooring systems and derricks.

National Oilwell expects to make some $3 to $4 billion in Brazil this year alone, in addition to its $11 billion backlog of other orders that will keep it busy, no matter where oil prices go. Buy it under $38, says Mr. Gue. The shares are at $30.61.

Jobs in both countries

The two other countries are working onshore. Mexico is going in the opposite direction to Brazil. Cantarell, the nation’s big oilfield off the Yucatan coast, is winding down.

In response, the national oil company, Pemex, is building up its efforts at the onshore Chicontepec project. It has 35 rigs operating and has already drilled 707 wells. Production could rise from 30,000 bbl/d to over 400,000 in the next eight years.

Iraq is trying to win back its rightful place in the oil world. No need to tell you why the oilfields slowed to a crawl. But aggressive efforts are being made to push production from 2.5 million bbl/d all the way to 6 million by 2013.

That figure may be unrealistic, Mr. Gue admits, but the effort alone is going to benefit someone. That someone is Weatherford International (NYSE-WFT), another drilling and oilfield services firm. And it has jobs in both countries — it is in the middle of Mexico’s efforts as well.

Weatherford outbid the 800-pound gorilla in the oil services industry, Schlumberger, for the Mexican contract. It has done a good job so far and is in line for more work. And it has two major contracts in Iraq. It’s a buy under $17.50 and has been rising steadily of late. It’s now $16.70.

So neither the demand for energy nor the need to drill has really dried up. The effort to extract oil will go on. And there will be profits.