Want a hedge for high oil prices? Try oil company shares
Filed under: Energy, Company News, Investing
What's one way you can hedge against a near-inevitable rise in oil prices? Buy shares of integrated oil companies, which are at their lowest price levels, on a price-to-earnings basis (P/E), in more than a decade.
Oil and gas producers in the MSCI World Index traded at a P/E of 7.84 in June, less than half the 17.1 P/E for developed markets, data complied by Bloomberg News indicated.
However, although economists see increasing crude prices in the year ahead, oil analysts are mixed on the 12-18 month outlook. Some analysts, such as Goldman Sachs (GS) and billionaire energy investor T. Boone Pickens, see a return to $85 oil by the end of 2009. Others see an oil price collapse to $40 or even $20 per barrel later this year, due to weak demand and high inventory levels that are maxing-out storage capacity.
Twenty dollar oil?! That'll be the day. Oil traded Monday up 91 cents to $64.45 per barrel.
Moreover, the major integrated oils reflect the slow-growth GDP forecast for the next 12 months. Still, unless you see an oil price collapse in the next six months, all are bargains. Here's a summary of each:
Exxon-Mobil (XOM), $69.26. P/E: 9.1. Exxon should benefit from several upstream growth opportunities in both oil and liquefied natural gas, and the company's superior technology should result in these projects increasing production quickly and efficiently. Technically, Exxon's chart appears to have held support at $65, with further support at $62 and $60.
Chevron (CVX), $65.82. P/E: 6.5. Investors have been exiting refinery stocks, due to an unfriendly refinery combination: a stubborn $60 oil price and falling U.S. gasoline demand. Still, look for that gasoline demand dip to end later this year. Hence, Chevron remains an attractive refining play: it owns 7 refineries and one asphalt plant, and has interest in 10 international refineries, for a total operable capacity of 2.14 million barrels per day, half of which is in North America. That's an impressive gasoline position, in the world's most lucrative gasoline market, so look for CVX to advance nicely, as gasoline demand growth resumes.
Conoco-Philips (COP), $43.10. P/E: 4. Another refining giant, Conoco, also should fare well as U.S. gasoline demand rebounds. At these prices, COP is practically 'as cheap as an empty shoe.' And as the late, great founder of the New York Giants Tim Mara used to say, 'Even an empty shoe box is worth $500.'
BP (BP), $49.86. P/E: 9. Look for this above-average reserve replacement, below-average cost integrated giant to improve its fundamentals over the next three years; a $3.36 annual dividend adds to the positive story.
Royal Dutch Shell (RDS.A), $51.15. P/E: 7.5. Co-ventures with Russia, and likely future projects in Iraq bode well for the company. Also, so long as oil prices remain about $57-60 per barrel, Royal Dutch Shell's Canada oil sands operation will add to its bottom line.
Oil Sector Analysis: Cheap oil shares, primarily driven down by the recession. To be sure, in today's less-credit-flush markets, few expect a quick return to $150 oil, but watch how well this sector fares as oil approaches $80. Top Pick: Chevron.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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Reader Comments (Page 1 of 1)
7-20-2009 @ 5:49PM
FSR said...
Lets not blind ourselves. These higher oil prices in the long run is bad news for everyone. They will keep pushing the economy further and further into recession. Salaries for the average hourly & salaried working Joe which is most of us have not even come close to keeping up with the inflation brought about by oil, gas and other economic issues.
For the economy to rebound you would have to freeze inflation where it is and boost the average working person's salary a good $15,000/year to bring it up to where salary and expenses balance out. I'm talking about those of us earning in the 20K-60K range not politicians and other wealthy fat cats. These higher oil prices will push the economy further into recession and eventually oil prices will have to tank as demand drops when workers either can't find work or the work available is not paying living wages.
Gas over $2/gallon is way more than the current economy can sustain for extended periods of time and we've been dealing with these rediculous prices for far too long, it's just a miracle that the economy didn't tank sooner. Notice how the Democrats now in power are no better than the Republicans in brining the oil/gas prices back in check. Where is the media criticism on the Obama's administration lack of inaction? How about a little equal rights criticism for all political parties and not just against the right?
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7-20-2009 @ 6:11PM
dang1067 said...
Writers such as the one who's responsible of this article should be hunted down without mercy, make him eat his own penis, then pluck its stupid head off from his mongoloid shoulder and then shove it deep in his stinking aanius!!!
Then ground the meat, and sells it to China where they can make their fvcking Dim-Sung!!!
Joseph Lazzaro is a fvcking monkey trying to lure rats with cheese laced with rat poison!!!
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7-20-2009 @ 9:06PM
Iridium said...
The problem is that the majority of the people affected by high oil prices can't afford to buy stock in oil companies as a hedge against inflation.
It must be nice to have a lot of extra money to throw around. The traders are all saying filling up my BMW is getting expensive. Guess I'll add some oil stock to my portfolio, that'll help. Why not just buy a few hundred barrels of oil? There are no rules against that anymore.
The entire problem with using investments like oil, currency, and gold as a hedge against inflation is that the hedge causes inflation. Inflation doesn't just happen, it is caused. The largest contributing factor to inflation is increasing the base costs to do business. Increasing minimum wage and causing base commodities to go up in price causes instant inflation. The slowdown caused by these factors causes a need for greater money supply which then increases inflation even more.
The disconnect between those who work in the financial industry and the mainstream has never been greater in history. The collective common sense IQ of Wall Street would be certified as brain dead.
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7-21-2009 @ 12:36AM
john said...
The problem is that OPEC is not making enough money to drill for more oil or do explorations. China also has a higher demand for oil right now. We will see oil prices rise higher than we've ever seen before. We need to find an alternative source of energy for transportation and we need to do it quick. Everybody wants America to colapse. Put all the pieces of the puzzle together and you will see. The banks want to control the world and you.
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7-21-2009 @ 8:27AM
LAWRENCE said...
HOW FAR IN THE TANK FOR THE OIL COMPANIES CAN ONE SHILL BE ?
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7-21-2009 @ 8:35AM
BELLCORD said...
SAW THIS SAME POPPYCOCK THREE YEARS AGO BEFORE THE SPECULATORS INFLATED THE LAST OIL BUBBLE....
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7-21-2009 @ 6:13PM
BELLCORD said...
THE GAWDAMN PLANET'S AWASH IN OIL, RESERVES'S ARE AT 14 YEAR HIGHS, INVESTORS HAVE TANKERS OF THE STUFF OFF SHORE WAITING FOR THE BUBBLE TO REINFLATE AND WE GOT CHEAPJACK FLACKS LIKE LAZZARO FLOGGING THE BLOGS WITH THIS DRIVEL...
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7-21-2009 @ 12:11PM
JR said...
This blogger must either be on crack or was paid by the oil/gas industry for this nonsense.
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