On CNN The case for buying oil stockshttps://money.cnn.com/2008/11/20/news/companies/okeefe_oil_stocks.fortune/index.htm?postversion=2008112107
I know I'm preaching to the choir but :)
The case for buying oil stocks
Investor Daily:Even with gas prices in free fall and the global economy sputtering,now may be the time to bulk up on oil shares (if you dare).
By
Brian O'Keefe, senior editor
Last Updated: November 21, 2008: 7:26 AM ET
NEWYORK (Fortune) -- Last week, the Paris-based International EnergyAgency released its World Energy Outlook 2008 - a 578-page book full offuture supply, demand, and price estimates which this year alsoincluded an eagerly-awaited study of 800 of the world's largest oilfields.
Here's the executive summary: Buy oil stocks.
Consideringthat the price of oil has plummeted from $147 a barrel in early July tobelow $50 and that the global economic slowdown is putting a majordamper on demand, that might not seem like such a good idea. But as theIEA study makes clear, the long-term supply and demand picture for oilcontinues to favor higher prices. Maybe much higher.
The reportestimates that energy demand will grow 1.6% a year on average through2030, for a total increase of 45%. To meet that demand, daily oilproduction will need to rise from today's level of 85 million barrelsto 106 million barrels. The study found high and rising depletion ratesat existing oil fields that will make it increasingly hard for newsupplies to keep pace. So, the IEA says, the world needs to invest some$26 trillion over the next couple of decades in infrastructure andexploration.
"Given what we know about the decline rates, justto stay flat [in global oil production] we'd have to add the equivalentof four Saudi Arabias between now and 2030," said Matt Simmons,chairman of Houston energy investment bank Simmons & Co.International and author of Twilight in the Desert, the 2005book that argues that even oil-rich Saudi Arabia's petroleum productionmight have peaked. "It's a very, very scary study. It's hard to arguewith the data and it's ghastly what the data says."
Over the nextseven years, the IEA predicts that the price of oil will average $100 abarrel, and rise to more than $110 by 2030. "The era of cheap oil isover," Nobuo Tanaka, the IEA executive director, told reporters at apress conference in London.
If Tanaka is right, the vicioussell-off in the equity markets over the past couple of months makesthis a historically good entry point for investors looking to graboil-industry bargains.
One stock to look at is National Oilwell Varco (NOV, Fortune 500),which has fallen 80% from its 52-week high. The Houston company sellsdrilling rig equipment, provides tools, and offers supply chainservices to oil exploration companies around the world. NOV estimatesthat more than 90% of the mobile offshore rigs and more than half ofonshore rigs built in the past two decades use components itmanufactured.
If you can get past National Oilwell Varco'ssomewhat goofy name, the stock is extremely attractive at the currentprice. Not only does it trade at less than four times its earnings forthe past twelve months, but NOV's market cap of $7.5 billion is lessthan its $12.3 billion in sales over the past four quarters - giving itan inviting price-to-sales ratio of 0.6. It's also on solid financialground. The $1.76 billion in cash on its books exceeds its $1.5 billionin long-term debt.
Unlike its stock, the company's business hascontinued to thrive this fall. In the third quarter, National OilwellVarco's sales increased 40% over the previous year. New orders worth$2.4 billion brought its total order backlog to a record $11.8 billion.Even if a few contracts get canceled, the company has pretty solidearnings prospects for the next couple of years.
If the IEA's vision of the future is close to accurate, NOV should be a big winner over the long run.
Looking for guidance in navigating these choppy markets? Let us know what topics you'd like us to coverand we'll try to address your questions in an upcoming Investor Daily.Please note: Fortune cannot give personalized advice on specificinvestments in your portfolio.
First Published: November 21, 2008: 4:58 AM ET