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How to Profit In Government-Backed Oil Companies
By Matt Badiali, editor, S&A Oil Report
January 10, 2008

Dark skies are looming for some of the world's biggest oil companies...

You see, from the 1930s to the 1970s, the major oil companies – the Shells, Exxons, and Texacos of the world – excelled at finding oil and delivering on promises to small, undeveloped countries. Most countries simply didn't have the financial clout or the technology to compete with the majors on a global scale... and the majors became some of the most valuable public companies on the planet.

But now, those roles – and power positions – are reversing. In just the past few years, we've seen countries use their oil assets like a baseball bat to cow the traditional majors. Venezuela, Nigeria, and Russia all recently renegotiated oil deals with major oil companies by threat (both subtle and overt). In some cases, assets have simply been "nationalized"... also known as "stealing."

That is a mounting problem for traditional major oil companies. I think the traditional majors are about to be eclipsed by a new hybrid – the state-owned oil company.

Don't get me wrong, some of these companies – like Mexico's PEMEX and Venezuela's PDVSA – are still backward, corrupt, and incompetent. Mexico, for instance, has managed to bungle production at Cantarell, the world's second-largest oilfield. However, a few state-backed companies emerged over the last decade as viable oil companies. The short list is Eni SpA of Italy, Total of France, Petrobras of Brazil, and StatoilHydro of Norway.

The national oil company combines the expertise and financial backing of a traditional major with the influence of a sovereign nation.

That works to the investor's benefit in several ways. First, countries like Nigeria and Venezuela will think twice about outright theft when it comes to the state-backed companies. We saw Bolivia's Evo Morales back down from a threat against Petrobras. I don't think he would have backed down from a traditional major like ConocoPhillips. But the wrath of Brazil's government is another matter entirely.

Second, state-run companies tend to get the best oil exploration rights on their home turf. For example, Brazil's oil ministry just cut several prized blocks adjacent to Petrobras' Tupi discovery out of a recent lease sale. You don't see the U.S. Congress cutting out leases in the Gulf of Mexico and handing them to ExxonMobil, that's for sure.

Third, these companies bring influence that extends far beyond oil and gas deals. That means, unlike independent majors, a state oil company can benefit from national trade negotiations.

Don't get me wrong... several of the "conventional" oil majors are still great investments. S&A Oil Report readers have made more than 50% in Chevron shares in just over a year, and I expect we'll double that in the next two or three. You can still find great values here.

Related Articles

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But resource investors are crazy to ignore the likes of Petrobras and a few of the companies I mentioned above. We're up 135% in Petrobras in less than a year. Considering it's the world's finest deepwater oil outfit, the big gains aren't all that surprising.

The next time you're looking to add a Big Oil stock to your portfolio, ask yourself if it has the power of sovereignty on its side. It may mean the difference between 20% gain and 100% gain over the next few years.

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.

Sign up today to read more investment ideas from Matt Badiali.

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THE BASICS RALLY REACHES NEW HIGHS

A look at the companies reaching new 52-week lows this week is another eyeful of the trend we described in November... the outperformance of "the basics."

A few notable new lows reached on Wednesday: Citigroup (largest U.S. bank), Ford Motor (cars and trucks), Boeing (largest U.S. airplane producer), Whole Foods (expensive groceries), and Pool Corp (largest U.S. pool company).

What you won't see making new lows are shares of consumer staples conglomerate Colgate-Palmolive. Investors believe, that despite the American spending crunch, folks will still buy Colgate, Speed Stick, Ajax, Softsoap, and Irish Spring. Colgate-Palmolive is up 21% in the past four months.

As scores of spending-sensitive stocks plunge, it is the Colgate-Palmolives of the world that investors turn to. In addition to food and medical stocks, it is here investors are flocking in order to avoid the storm. Us? We still like gold.

Colgate-Palmolive Co.

Hyundai Heavy Industries Co. and other South Korean contractors may receive a third year of record orders for refineries, floating platforms and power plants to support economic growth in the Middle East and Asia.

The nation's construction companies and shipyards will probably win combined orders of as much $50 billion this year, the Ministry of Commerce, Industry and Energy said in a statement today in Gwacheon, South Korea. About $42.2 billion worth of orders were received last year, 66 percent more than the $25.4 billion in 2006, the ministry said.

Orders for drill ships and offshore production platforms increased 29 percent to $13.69 billion last year, the ministry said. Contracts for power and desalination plants almost tripled to $12.89 billion and those for petrochemical plants more than doubled to $97.2 billion.

Orders from the Middle East rose 37 percent to $12.27 billion last year, accounting for 29 percent of the total contracts, the ministry said. Those from other Asian nations more than tripled to $11.57 billion and those from Africa more than doubled to $7.93 billion.

– Bloomberg

[W]ord is out that the Bush Administration is considering a $500/household tax rebate to jump-start the economy, and we shall go on record as saying that that is one of the most idiotic decisions we can imagine. We find it quite sad that the Administration is prepared to use what modest sums of political capital it may have to push for a rebate when it should be using its capital to demand that the tax cuts it promoted several years ago but which shall expire in 2010 be made permanent!

This proposed tax rebate will have a beneficial effect upon the economy... make no mistake about that! It will have a very beneficial effect indeed, but that effect will be one-off rather than permanent. It will entice one-off buying of goods, but once that one-off effect is finished, the only other effect shall be to boost inflationary pressures and to ramp up the budget deficit materially.

The public may love the notion of a $500 rebate, but we shall find it merely politically expedient but economically sad.
– Dennis Gartman,
The Gartman Letter

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