How To Invest In Oil Right Now
by Matthew Badiali
October 17, 2006
T. Boone Pickens says oil prices will hit $70 a barrel by the end of 2006.
Stephen Roach says the correction in oil and other commodities has just begun.
If both of these men were uniformed rubes, this difference of opinion wouldn’t be worth paying attention to. Pickens, however, is one of the smartest oilmen to ever put on a pair of cowboy boots. Roach is the respected chief economist of Morgan Stanley.
I’ve listened to both the bull and bear arguments on oil… and you can easily make a case for oil falling some more… or jumping back to $70 a barrel. This schizophrenia makes for a tough time to speculate in oil stocks… either short or long. It’s impossible to predict the immediate future.
It is a fantastic time, however, to invest in oil stocks.
If you’ve been reading my colleague Porter Stansberry’s Investment Advisory, you know that this is a great time to buy blue-chip stocks. In his July 2006 issue he wrote:
“…in five years’ time, 10 years’ time… you will look back on these days and shake your head in disbelief that you could buy stocks like Intel, Microsoft, Johnson & Johnson, Nokia, Anheuser-Busch, Raytheon, and Verizon… at the low multiples of earnings and cash flow that you can find them at today.”
I agree with Porter completely, except I think he left out some key stocks: major oil companies. You may not realize it, but supermajor oil companies are some of the best wealth-creation vehicles in the market. Take $140 billion market cap Chevron for instance…
If you bought Chevron stock in 1996, you’d have a 241% return on your investment today (with dividends)… an average of 13% per year.
“But Matt,” you say, “that includes the last five years, which were a historic bull market for oil. How do we know that’ll happen again?”
You don’t need it to happen again.
For example, over the eight-year period from March 1991 through August 1999, the price of oil rose a grand total of 8%. However, Chevron shares returned 238%… a whopping 16% per year! These companies have the management, experience, and infrastructure to make plenty of money if the price of oil is $60 a barrel or $30.
Even better, right now, many of these big oil companies are trading at dirt-cheap valuations… and my portfolio is full of some of the bluest of the blue-chip oil companies. I’m not the only one to see these fantastic bargains.
Legendary value investors like Warren Buffett and David Dreman are loading up on shares of big oil. Buffett’s investment vehicle, Berkshire Hathaway, recently reported a 17.9 million-share position in America’s third-largest oil company, ConocoPhillips.
So what are Buffett and Dreman seeing these days? Dirt-cheap stocks. Here’s a quick look at three of North America’s best oil companies:
Price to Earnings |
Company |
P/E Ratio |
ConocoPhillips |
5.36 |
Chevron |
8.80 |
ExxonMobil |
10.53 |
|
I believe the next few months will be like shooting fish in a barrel for long-term oil investors. Weaker oil prices will produce less-than-stellar quarterly earnings reports from the oil companies. Ongoing expenses encountered in exploration will also act as a drag on results.
Wall Street might get rattled, but I’m unconcerned. Any price weakness will give us the opportunity to buy valuable oil assets for a low price.
Still, our window of opportunity could be closing. North Korea just tested a nuclear weapon, which dramatically changes the state of the world. It doesn’t have any bearing on how much oil we have… but it will affect the price.
Also, the head of OPEC has decided “enough is enough” regarding falling oil prices. Edmund Daukoru, Nigeria’s oil minister, called for an across-the-board production cut. He wants 1 million barrels per day off the market. In fact, Saudi Arabia, Venezuela, and Iran want to convene OPEC leaders in Vienna to make the cuts formal.
When it comes down to it, short-term earnings misses and OPEC posturing aren’t the point here…
The point is this: You may see some share price weakness in the supermajors as oil corrects, but for long-term investors, it’s just a buying opportunity… and now is a great time to take a position in big oil.
Good investing,
Matt Badiali
Editor's note: Matt Badiali is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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