Making Money in Oil
Posted on January 10, 2008 in the Investing, Stocks category
.The price of oil has risen for six straight years. The average price of a barrel of oil in 2007 was $72 a barrel. A new record.
What investors want to know is whether oil prices have peaked or whether there are still opportunities in the market to make money?
Paul Horsnell, a former Oxford economics lecturer who has spent 11 years as assistant director of the Oxford Institute for Energy Studies doesn’t see any reason for oil prices to fall. He thinks we will probably be stuck with today’s high price levels next year and that oil prices will spend some time trading above the yet-to-be-pierced $100 per barrel. He is confident that 2008 will be the seventh straight year of price increases.
I agree with Horsnell. With the increased demand for oil from China and no sign of a reduction of US demand, I see no way that oil prices can decline unless there is an unexpected increase in supply.
But you are asking. How can I profit from these strong oil prices.
One way to play the oil market is through Petrobas. Petrobas is Brazil’s largest oil company and CGM’s fund manager Ken Heebner thinks is the best way to play oil right now. With petroleum prices so high, a big risk for oil companies is that host countries will demand a bigger share of the profits in the form of taxes or royalties. “One way you can avoid this,” says Heebner, “is if the government owns half the company you’ve invested in. That’s Petrobras.”
Petrobras is cheap enough, at 16 times earnings, that it can be a winning investment even if Heebner is proven wrong about $100 oil. The company just announced a huge find offshore from Rio de Janeiro, a field said to have up to eight billion barrels of recoverable oil.
Fadel Gheit, an analyst at Oppenheimer & Co. in New York thinks that smaller companies are a better bet than the heavyweights such as ExxonMobil (XOM) and Chevron (CVX). Among the independents, he recommends Noble Energy (NBL), which has doubled production since 2000, and Apache (APA), which specializes in squeezing oil from older fields.
Eitan Bernstein, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Va., thinks two stocks worth considering are Occidental Petroleum (OXY) and Valero Energy (VLO). Occidental, a medium-size company, has reclaimed its old concessions in Libya, one of the world’s most promising oil countries. Valero, the largest U.S. refiner, is selling off less profitable properties after an acquisition binge and is buying back stock.
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