2/18/2011 7:01 PM ET|
5 energy stocks to buy now
Major oil companies are struggling to obtain new reserves. I suggest looking at some oil producer and oil services stocks, which will benefit from their search.
On Jan. 27, I argued that the U.S. economy is still in the early recovery stage of the business cycle and that you should overweight your portfolio toward the stocks that do best at this point in the cycle. "Sectors that do best are usually industrials, near the beginning of the stage; basic materials; and, near the end, energy," I wrote.
The next stage for the U.S. economy is late recovery: "Sectors that have done well in this stage include energy and, near the end of the stage, consumer staples and services."
See any sector that those two stages have in common? Yes, energy. So why not overweight energy right now? Several readers asked me that, noting that by doing so, their portfolios could catch the sector's outperformance at the end of the early recovery stage as well as its outperformance in the first part of the late recovery stage.
That's an excellent idea -- just be careful which energy stock you pick. The sector is a little tricky to navigate right now. Be highly selective on oil stocks. I think most of the international majors aren't all that attractive right now. Instead, I'd favor oil equipment and service companies, as well as small oil producers that are increasing production and that look like acquisition candidates.
The problem with big oil
What's the matter with buying big oil now? After all, the sector 'integrated oil and gas" has soundly beaten the Standard & Poor's 500 Index ($INX) over the last six months. It gained 23.91% for the six months that ended Jan. 31, compared with the S&P's 17.93%. In the three months that ended Jan. 31, the sector gained 12.82%, versus the S&P's 9.3%.
But big oil -- and I do mean big, since Exxon Mobil (XOM, news) has a market capitalization of $416 billion these days and Royal Dutch Shell (RDS.A, news) comes in at $217 billion -- has recently shown signs of struggle. BP (BP, news), for example, closed at $49.25 on Jan. 14, but closed at just $47.30 on Feb. 16. Royal Dutch was at $73.35 on Feb. 1 and $69.75 on Feb. 16. Chevron (CVX, news) was at $97.74 on Feb. 7 and $96.66 on Feb. 16. ExxonMobil closed at $83.91 on Feb. 1 and at $83.69 on Feb. 16.
The problem that's started to worry investors? Reserve replacement. And ExxonMobil's year-end report is a good place to start in understanding this problem.
In 2010, ExxonMobil said it increased its reserve base by 2.5 billion barrels to 24.8 billion oil equivalent barrels. The increase enabled ExxonMobil to replace 209% of the oil it produced. In other words, even after all the oil it produced in 2010, the company ended the year with more oil than it had started with.
The problem with ExxonMobil's reserve replacement report is that the 209% figure depends on the company's big acquisition of XTO Energy. The purchase of XTO's 2.8 billion barrels of reserves accounted for about 80% of the reserves that ExxonMobil added in 2010. Without the XTO purchase, ExxonMobil's reserve replacement ratio would have been just 45%, Barclays Capital calculates.
This isn't a problem just for ExxonMobil and it isn't a problem that's about to go away quickly. The national oil companies of countries such as Saudi Arabia, Mexico, Iran, Brazil, and Russia produced 52% of the world's oil in 2007, according to the U.S. Energy Information Administration, but they controlled a whopping 88% of the world's proven oil reserves. To replace the oil the international majors are producing, international oil companies have had to look harder to find oil and spend more to produce it. Chevron's 2011 capital budget is an example of just how expensive this effort can be: For the coming year, Chevron will spend $22.6 billion on exploration and production. That's a big increase from the company's already substantial $17.3 billion 2010 exploration and production budget.
It takes time to turn capital spending into oil. Chevron has one of the industry's best pipelines of new projects, but the company added just 240 million barrels of oil equivalent reserves in 2010. That yielded a replacement ratio of just 24%. The delay in payoff for Chevron's investment is one of the reasons the company's stock sells for 10.2 times trailing 12-month earnings, while shares of ExxonMobil sell for a trailing price-to-earnings ratio of 13.4%.
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Carbon based fuels will be with us for the next 50 years. We can not switch over to alternative fuels due to the infrastructure costs we have in place for oil based fuels. I read the infrastructure cost just for CNgas from gasolene would be in the Trillions of dollars.
There is no alternative fuel that we can use exclusively today and I wish people would use their heads when talking about switching.
But of course it is only common sense to try to switch to "something" as that is what keeps the the stock market interesting and the only way to redistribute the wealth.
Looking at oil production in the United States check out the Uinta Basin Altamont, Bluebell fields in Utah. I drove through there twice in recent months. For companies like El Paso E&P Company, LP and Homeland Oil and Gas the price of oil is just to cheap for them to drill any new wells. Other companies there have the same problem. I am told look for oil to be $ 200.00 to $ 225.00 before the really get interested in drilling there again. One well there costs over three million to drill. Incidentally I passed tanker after tanker leaving the fields out there on the way to North of Salt Lake City where the refineries are. They are trying to get all the production they can from the hundreds of old wells out there.
"big oil" isn't stupid. they know the end of oil as we know it will happen and have set up other corporations using big oil profits to develop alternate energy systems. the trouble is finding where big oil has placed their own money. Shell Oil and BP are two of the largest producers of solar pannels. why? because they know it has a solid solid future. where else has big oil placed their money and how can we buy stock in those other "sub" corporations? it's likely not under the names we're already familiar with.
i've ready articles about "why isn't big oil investing" in themselves? ~ well, they are, just they are not investing in OIL anymore.
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