Oil stocks may be cheaper than you think
Don’t worry about the West, says this U.S. advisory. The developing world will push oil prices higher— and make six oil stocks bargain buys.
What was the biggest economic story of the past decade?
Not the high-tech bubble that started it, nor even the mortgage bubble that ended it, says one leading U.S. advisory.
No, it was oil.
Back in 2000, oil traded in a comfortable range of $10 to $40 American dollars a barrel. Then we hit a gusher.
That gusher took us almost as high as $150 a barrel two years ago. And we’re not finished yet, says The Complete Investor.
The price of crude oil sits at about $76 today. You can expect it to rise well above that level, says Mr. Stephen Leeb, the advisory’s editor.
The game has changed. It doesn’t all come down to the U.S. and its fellow western nations any more, this editor explains.
And when he’s done explaining, he has six large energy stocks for investors to buy.
Never slid back
When recession struck early in the decade, oil started to move away from its low, comfortable trading range, Mr. Leeb reminds us. Initially, it jumped above $50.
But the strange thing was that its big push in 2008 occurred “without inducing significant new production or even prospective production.”
Things got stranger still. As the world “endured the worst economic downturn since the 1930s, oil never slid back to its longtime trading range,” says the editor.
“Despite persistently slow growth in the U.S., where demand grew hardly at all, the commodity finished the decade at nearly $80.” That’s more than 50 per cent above its average for the past 10 years, and more than 400 per cent above its low of $16.70 at the start of the decade.
Peak oil
The conclusion is inescapable, as far as this analyst is concerned — “Western demand no longer drives the price of oil.”
What’s more, supplies are tightening. 10 years ago, the idea of peak oil was considered “a fringe notion.” Now, even the International Energy Agency accepts the idea that the world’s supply of oil may reach its peak in 10 years. Some think it will come much sooner.
At any rate, says Mr. Leeb, even if Western economies aggressively conserve energy, oil prices will remain high thanks to limited future production and continued growth in the developing world, with China leading the way.
“In fact, conservation, by lowering the oil’s price, would simply stoke demand even more in the developing world,” adds the editor.
In short, only a major economic setback can keep the price of crude oil from going higher, and ultimately much higher, says Mr. Leeb, even if it does rise in “fits and starts.”
And yet, despite all the logic pointing to higher prices, oil stocks are relatively cheap at the moment. Six look like particular bargains.
A bet on recovery
Most energy companies did not suffer big earnings losses in the recent recession. Yet their prices look “exceptionally cheap” if there’s to be a continued rise in oil prices, says Mr. Leeb.
He begins with two that do not depend exclusively on oil prices. ConocoPhillips (NYSE-COP) and drilling firm Nabors Industries (NYSE-NBR) will benefit from higher oil prices, but they take more of their momentum from natural gas. This is a domestic commodity, so a bet on natural gas is a bet on American economic recovery.
It’s also a bet that supplies won’t overwhelm increased demand and a bet on the environmental benefits of gas — the cleanest fossil fuel.
Mr. Leeb likes the bet. Policymakers will go all out to promote growth at home, even at the expense of inflation, he says. Plus shale deposits across the U.S. may not yield as much gas as previously believed. And while gas can’t replace oil, it could start to elbow out that dirtier fuel, coal.
Conoco trades at $49.43 and yields a robust 4 per cent on its $2.00 dividend. Nabors is trading at $23.84 and has no dividend.
The greatest potential rewards
The other four stocks are more closely tied to the price of oil. The most aggressive of them, “with the greatest potential rewards,” says the editor, is Petrobras (NYSE-PBR) of Brazil.
If the deepwater salt flats off the Brazilian coast in which the firm has a stake can be developed economically, this company’s earnings will surge and stay there for many years. The stock trades at $41.33 and yields a little less than 1 per cent on its $0.38 dividend.
Among the big integrated American oil companies, this advisory likes Chevron (NYSE-CVX) the best. It should hold its own in “thick and thin,” says Mr. Leeb, and it hasn’t cut its dividend in 40 years. The yield on that $2.72 dividend is a substantial 3.8 per cent and the shares are at $72.69.
The final two stocks are giants in oil services. Schlumberger (NYSE-SLB) is the biggest in the world. The stock’s current trading multiple is at an all-time low, says Mr. Leeb, but as deepwater exploration and drilling become more important, so will this firm’s highly specialized expertise. It yields 1.3 per cent on its 84¢ dividend and trades at $64.90.
When it comes to the actual deepwater drilling rigs, the largest supplier in the world is Transocean (NYSE-RIG). This is the last “sweetspot” in oil exploration, the final frontier for hydrocarbons. This firm’s profits fell in the recession, but they’re still at historically high levels, while its price/earnings ratio is at its lowest in years. Few stocks offer better risk/reward potential, says the editor. It trades at $82.51 but has no dividend.
Whether or not you agree that oil was the biggest story of the decade, you can be sure it will have the full attention of investors if it keeps going higher.
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