Sliding Back Into Oil

Jon Bruner, 02.02.07

After falling from $61 per barrel at the end of December to $52 on Jan. 11, oil bounced back to $58 in late January, as a cold snap rudely awakened Northeasterners who had been enjoying near-record winter warmth.

Prices could go much higher. “Oil is much more likely to finish the decade at $100 or more [per barrel] than at $50,” argues Stephen Leeb, president of Leeb Capital Management in New York City, and an author of several books on energy markets and investments.

Leeb says that the market has not fully recognized the constraints on the oil supply in Venezuela, Iran and Kazakhstan. Other factors favoring higher prices: rapidly rising demand in countries such as China and India and the location of much of the world’s oil reserves in politically volatile and unstable countries.

Video: Oil At $200 A Barrel?
While Leeb is confident about the long-term outlook for energy prices, he will not set a specific short-term price target. Nevertheless, $45-per-barrel oil prices at the end of 2007 would surprise Leeb more than $65-per-barrel oil.

He dismisses recent speculation that Saudi Arabia will keep prices in the $50 range, pointing out that the desert kingdom has often claimed to be able to set the worldwide price of oil, only to have it become clear that oil’s price is well outside of its control.
Just last summer, for instance, when oil was over $75 per barrel, Saudi Arabia’s taps were wide open, suggesting to Leeb that although the Saudis can keep oil prices from falling, they have limited ability to prevent oil prices from rising.
The group most favored by Leeb is oilfield services companies, which he thinks will do especially well, almost regardless of the price of oil. He notes that demand for their services and technology will rise as oil becomes harder to find and extract. In January, Schlumberger, the largest oil services concern, delighted Wall Street with unexpectedly high earnings.
Leeb foresees Schlumberger delivering strong earnings growth through the end of this decade and into the next. “What other major blue chip company is saying it’s going to have high-teen growth for the remainder of the decade and beyond, and is trading at a historically low price-to-earnings ratio?" asks Leeb. Schlumberger sells for 17 times its Thomson IBES consensus for next-12-month earnings.
Interested in integrated oil? Leeb has Hess as his top pick in this group. He thinks that its upstream activities are the best among the big companies, and that means it can boost its earnings even without a spike in oil prices.
That is not true to the same extent with the big three U.S. oil companies, Exxon Mobil, Chevron and ConocoPhillips. Leeb says that their oilfield operations have less room to expand, but they remain good bets for the long-term investor willing to bet on higher oil prices.
Oil prices that approach $80 per barrel will also stimulate demand for alternative energy, says Leeb, particularly wind power, which is reasonably efficient and available. The largest generator of wind power in the U.S. is FPL Energy, a subsidiary of FPL Group. “People think it’s still a utility, but really, it’s become an attractive growth stock,” says Leeb. FPL also operates solar, hydroelectric and nuclear plants in addition to several natural gas and three oil plants.
And if oil prices stay high, prices for other forms of energy will move in tandem. One good way to invest in coal is to buy shares in railroads that carry lots of it, like Burlington Northern Santa Fe, which transports the bulk of the coal that emerges from the Powder River Basin in Wyoming, the source of the cleaner-burning coal that domestic users prefer.
Burlington Northern also has the largest U.S. intermodal operation for transporting truck trailers on railroad cars. Trains are more efficient than trucks in shipping large quantities of goods over long distances, so if diesel prices go up, then shippers could shift to railroads.
In The Energy Business
Company
Price
2006-2007 Estimated EPS Growth
Next 12-Month P/E
Estimated Long-Term Growth*
Market Value ($Mil)
Burlington Northern Santa Fe
$81.47
13%
15
14%
$28,761
Chevron
74.47
-9
10
8
158,877
ConocoPhillips
67.31
-3
7
9
109,296
Exxon Mobil
75.08
-4
12
10
432,187
FPL Group
57.45
9
18
8
22,938
Hess
54.54
-1
10
10
15,180
Schlumberger
64.39
22
18
23
74,805
Prices as of Feb. 1.EPS: Earnings per shareP/E: Price-to-earnings ratio* Estimated Long-Term Growth: Annualized, estimated for the next three to five yearsSources: FT Interactive Data, Reuters Fundamentals and Thomson IBES via FactSet Research Systems.

http://www.forbes.com/2005/01/10/cx_da_0110doomoil.html