Fortune Says Oil Stocks are a Bargain

I certainly can’t disagree with this:

Betting on big oil’s comeback

The article first argues that oil prices are unlikely to stay low for too long:

“Right now, the upsides in the oil sector far exceed the downside risks,” says Fadel Gheit, an analyst at Oppenheimer & Co. “I am absolutely convinced that oil prices will rise.”

After last year’s $100 free-fall rocked expectations, that kind of confidence is surprising. But Gheit is not alone; a strong consensus is growing for a price rebound. While crude isn’t likely to rocket back to the sky-high levels of 2008, even bearish analysts admit that oil can’t stay below $50 for long.

Those are of course my sentiments as well. I believe that long-term oil prices are going to see robust growth. Short-term it may run up to $150 and back down to $35, but my metric is always to ask where oil prices will be in 5 or 10 years. I believe they will be more than double where they are now, so I am leaving oil company stocks in my portfolio for the long haul, even if prices fall to $20 for a while.

They spoke favorably of the two oil stocks in my portfolio:

Other large stocks stand ready for a rebound. ConocoPhillips (COP, Fortune 500), whose shares have fallen 57% over the last year, has a price to earnings ratio of 9 versus Exxon’s 13. The company has a large amount of refining exposure, which hurt its bottom line in 2008 because of rising oil prices and slowing consumption.

Maran says that ConocoPhillips was unfairly penalized because of its partnership with Lukoil and its expulsion from Venezuela. Investors are worried about political risk – an overreaction, he says, and one that’s likely to change if more countries invite foreign companies in to revive their flailing economies.Another big producer analysts say is undervalued is Petrobras (PBR), which discovered a series of mega-fields off of the Brazilian coast two years ago. Goldman’s Murti recently wrote that Petrobras “may be the best positioned major oil company in the world for the next oil price upcycle.”

It’s still unclear how much the company’s offshore find is worth, but Don Coxe, a longtime oil guru who now runs Coxe Advisors, likes what he sees. “Petrobras is a special story, and investors want to be a part of it,” he says. “They could find $25 billion worth of oil down there.”

ConocoPhillips has been a wild ride. Fortunately, I was in very early, so I am still ahead even after the steep fall. Petrobras has been all positive. In early December, it looked to me like an absolute steal based on their reserves (see Loading Up on PBR). Despite the rocky road for stocks in general lately, PBR has been the gem in my portfolio: Up as much as 70% since I bought it.

While I have taken losses just like most people, PBR has moderated the rest of my portfolio. And as oil prices rise back to the $60 range, I expect PBR will be double what it is now, and COP will be up 30-40% over today’s price.

2 thoughts on “Fortune Says Oil Stocks are a Bargain”

  1. If you think oil prices will rebound soon, then British Petroleum and Shell are offering handsome dividends. BP is offering a dividend near 10 percent. You could buy and wait for the rally, and get paid to wait.
    Shell is spending $20 billion on a GTL plant in Qatar and another $20 billion on an oil shale plant in Jordan. That is an interesting company, and also pays a good dividend.
    That being said, I think as likely is that we first see oil down to $10 a barrel. We saw $10 a barrel in 1998, in a Far Eastern recession. This is a global recession, and deep. Demand for oil in 2009 may be 10 percent lower than 2008, meaning as much as 10 mbd of excess supply on the market, on total global demand around 78-80 mbd.
    OPEC is cutting production, by 4 mbd or more, and who knows what is determining prices on the NYMEX.
    But Russia just entered into a 20-year contract to sell oil to China for $20 a barrel. Maybe they are needy for cash, but I have to assume they do not believe in $150 oil soon.
    In previous cycles, the road back to high oil prices was very, very long. Think in terms of decades.
    In addition, if certain governments (especially China and the USA) essentially mandate or tax-force conservation, we may never see oil demand recover. It is a risk.
    Right now, the biggest threat we face is Peak Banking, not Peak Oil. How long until our financial systems recover their vitality? Is Japan a lesson (never). Sweden (a few years).
    I hope for sunnier days. But we may not see economic recovery for years, and oil prices even longer.

  2. We saw $10 a barrel in 1998, in a Far Eastern recession. This is a global recession, and deep.
    In 1998, world oil consumption was ~74 mbd. Crude oil production was ~75.7 mbd. So you had a cushion of ~1.7 mbd.

    The data for 2007 (preliminary) shows demand at ~85.9 mbd, supply at ~84.4 mbd, for a shortage of ~1.5 mbd.

    Bottom line: This isn’t 1998, Benny, as numerous events would confirm…

    Demand for oil in 2009 may be 10 percent lower than 2008, meaning as much as 10 mbd of excess supply on the market, on total global demand around 78-80 mbd.
    Your arguments are inconsistent (again!), Benny: 10% lower demand (~8 mbd) is going to produce 10 mbd of excess capacity? And after OPEC has taken 4 mbd off the table? What about falling production in Mexico and Venezuela? Seems to me supply and demand can’t be very far apart anymore…

    But Russia just entered into a 20-year contract to sell oil to China for $20 a barrel.
    Wanna bet the Russians find a way out of that contract if oil stays above $40/bbl? (Not that the Chinese would pay $20/bbl in the unlikely event that prices did collapse…)

    In previous cycles, the road back to high oil prices was very, very long. Think in terms of decades.
    There seem to be some resistance to oil going below $40/bbl. Why would that be, Benny?

    Sorry, Benny, but your happy-day-are-here-again expectations are not only inconsistent with itself ($10/bbl will KILL ALL alternatives), but sadly out of touch with reality…

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