Are oil stocks about to gush again?
Oil prices may reach new highs before the stock market does, says this U.S. advisory, which names seven stocks that should strike it rich.
Here we go again. After folks had been content to swear off oil stocks for a while, they’re back.
Or at least they will be, and you should be ready for them. That’s what one leading U.S. advisory thinks, and it has some fuel for its theory.
The oil market is not what it used to be, according to The Complete Investor. “This is not your father’s oil market,” is how the editor, Mr. Stephen Leeb puts it.
The supply-and-demand dynamic is operating a little differently now than it has in the past. We’ll find out how and what it means for investors.
We’ll also discover which seven stocks this advisory believes are the best bets to hit a gusher when this oil revival takes place.
But first we’ll take a quick side trip to China and Canada to touch on an issue of some interest to Canadian investors.
A strategy for Suncor
In a related article, The Complete Investor discusses the Chinese energy industry, which is growing in strength and independence.
As a testament to that growth, the advisory cites China National Petroleum’s reported interest in buying the $5 billion worth of assets in Lybia and Syria owned by Petro-Canada (TSX-PCA).
If this is so, the sell-off could be part of a strategy by Suncor Energy (TSX-SU) to concentrate its activities in North America following its merger with Petro-Can.
China National Petroleum owns 80 per cent of the national oil company, Petro-China (NYSE-PTR), which this advisory likes very much and holds in its Income Portfolio. (It holds Canadian Oil Sands Trust (TSX-COS.UN; OTC-COSWF) and TransCanada Corporation (TSX/NYSE-TRP) in the same portfolio.)
But let’s get back to the well and see why oil is bound to be in again.
A severe mismatch
“The sharp drop in oil prices masks deep strains that will become obvious once the world begins to grow at a fairly normal pace,” says Mr. Leeb. “Sooner than you might imagine, we’ll see a severe mismatch between lagging oil supplies and rising demand.”
Be ready to move, says the editor. “New highs in oil will likely come well before new highs in the stock market, meaning investors should overweight oil (and other commodities).”
He does not believe the U.S. economy, or the global economy, will be caught in a long downspin. And he thinks growth in the developing world will accelerate, as China, “unencumbered by bad banks,” ramps up the pace.
While the timing may be open to debate, adds Mr. Leeb, there is no doubt that oil prices will rebound.
Drop in the bucket
The emerging economies — those dominated by agriculture or manufacturing — account for nearly half of global economic output.
The population of the developing world is five times that of the developed world, but its per capita consumption of material goods is the exact reverse — only one-fifth of the developed world.
These nations can only grow by consuming oil and other commodities.
And the situation we face today is nothing like that of the last big oil shock in the late 70s and early 80s. Worldwide consumption fell 10 per cent, due almost entirely to falling demand in the developed world.
This time around, an 11 per cent dip in consumption in the developed world is a 2 per cent drop in the bucket of worldwide demand.
If the U.S. economy begins to grow just a little, oil demand will stop declining in the developed countries. And as growth accelerates in the emerging economies, it will take off.
And the demand can’t be supplied overnight. Oil production was not that high even in mid-2008 when oil brushed $150 a barrel, says Mr. Leeb. Since then, many projects have been shut down and it will take time to get it all revved up again. “In sum — look out for higher prices.”
A fire under seven stocks
Those higher prices should light a fire under seven stocks, says this advisory. Three of them are big integrated firms.
Chevron (NYSE-CVX) and ConocoPhillips (NYSE-COP) “stand out from other U.S. integrated oil companies because of their potential to increase production over the next five years, while reserve replacement should be nearly 100 per cent.”
The advisory issues a word of warning, however. Both stocks are liable to drag their feet in the near future, due to lower earnings (Chevron) and natural gas prices (Conoco). Both offer juicy dividend yields for investors as they wait — almost 4 per cent for Chevron and 4.25 for Conoco.
Petrobas (NYSE-PBR), on the other hand, will be moving as fast as it can to exploit the large oilfields that have been discovered off the coast of Brazil. The Brazilian national oil company could see its production grow by 9 per cent a year over the next decade.
The other four stocks come from that group that harvests the earliest profits from rising oil prices — the oilfield service companies.
Schlumberger (NYSE-SLB) is the biggest of the group, and number one in the world in almost every area it covers, from well testing to pressure pumping to seismic testing. Nabors Industries (NYSE-NBR) is the largest land driller in the world and it is now branching out into offshore drilling, cutting its dependence on natural gas drilling.
Transocean (NYSE-RIG), as its name suggests, is right in line to profit from the Brazilian offshore bonanza, among others. Deepwater drilling is the fastest-growing area of oil exploration. Who knows how much it will grow in the years ahead?
This advisory particularly likes National Oilwell Varco (NYSE-NOV) an “utterly dominant manufacturer of rig equipment and services,” which has a large backlog of orders. A drop-off in the servicing of rigs may hurt in the short term, but it will be an area of strength when prices recover.
Auto sales are up in China. Is this an early sign of a new boom in oil prices? Stock up now, says this advisory, because when the race to rebuild supplies gets under way, we could be in for a very big gusher.
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