BusinessWeek: Oil Stocks: Plenty of Fuel Left.
Q: Steve, what's your forecast now for oil prices and their effect on the stock market -- which is, of course, a big area of expertise for you?
A: I believe oil prices' uptrend will remain. It won't be straight up, but by and large the factors that have caused oil to go from $10 a barrel in '98 to more than $50 now are very much in place. Demand for oil is very much in place, given the expanding economies in India and China, whereas the supply is ever more limited.
So the only question for me is, short-term dips notwithstanding, how quickly oil prices rise in the forthcoming period -- not whether they'll increase, but how quickly they'll increase.
Q: What are your favorite energy plays? Is it too late to get into the sector?
A: No, it's not too late. Hard to believe, but virtually no Wall Street analyst believes that oil prices are going to stay in an uptrend. What this means is that energy stocks are currently valued as if oil prices are going to come down -- and come down a lot (30% or more), over the next three to five years. Plus, if I'm right, the entire energy sector is exceptionally cheap. Beyond the usual suspects such as Nabors Industries, Suncor Energy, and the oil producers are some interesting alternative energy plays. These include Air Products & Chemicals, FPL Group, and Exelon.
Q: I would welcome your opinion on EnCana (ECA ) and Transocean (RIG ).
A: Both those stocks are in our portfolio, and we like them both very much. EnCana, as with Suncor, has a stake in the Canadian oil sands and has an excellent production future -- i.e., it's going to be increasing in the foreseeable future. Combine that with rising oil prices, and you have a genuine growth stock, which is trading at a very modest multiple of less than 13 times earnings.
As for Transocean, it is by a wide margin the most significant and largest deepwater driller for oil, and if there are any additional significant hydrocarbons to be found in the world, they're going to be found in the deepest waters. This highly leveraged driller should see torrid growth for many years.
Q: Won't alternate energy sources eventually bring down oil prices?
A: I hope so. That's a very complicated question. The short answer is, eventually, yes. But the caveats include extremely long lag times between bringing on alternative energies, between the planning and fruition stages in these alternative sources. For example, were we to start building a new nuclear plant today from scratch, it could easily take as long as a decade to finish.
For me, and I realize I'm on a soapbox right now, by far the most interesting alternative energy is wind. In the June 24 issue of Science magazine, there's a peer-reviewed article by a Stanford professor who argues that electricity generated from wind could economically generate, via downstream production of hydrogen gas, enough to fuel the entire vehicle fleet in the U.S.
Clearly, this is an aggressive statement, but it does come from a very reputable source in one of the most reputable science magazines in the world. The biggest players in wind, in case you want an investment angle, would be FPL, General Electric, and Scottish Power (SPI ).
Q: Do you see any near-term opportunities in the oil-equipment segment?
A: If you mean stocks like Halliburton (HAL ) and Schlumberger (SLB ), I think they represent wonderful opportunities. We'd advise accumulating shares in both.
Q: Is it economical to go after the tar sands in Canada?
A: It's economical, and indeed, Suncor, EnCana, PetroCanada (PCZ ), and Canadian Oil Sands Trust (COSWF ) are four companies with very strong production growth rates by virtue of their stake in the tar sands. However, there's a limit to what we can expect the tar sands to produce, as mining these sands happens to be energy-intensive and unfriendly to the environment. Still, this should be a very fruitful area for many years, and each of these four companies should be very strong performers.
Q: Are there any interesting investments to be had in the biofuels industry?
A: Not really. Perhaps Archer Daniels Midland (ADM ) in the ethanol area. But I don't believe ethanol is a meaningful source for alternative energy. I think we should be funding biofuels, and there's some interesting technology concerning ways of converting carbohydrates into fuel, but at this point, the technology is very interesting but quite expensive. Funding this technology is something the government should be doing whole hog.
PS. Leeb likes gold too. Read the interview for that, I chose not to highlight it. It's not the focus of this blog, and it's not a pony I am personally riding at this point. Additionally, please use caution about how you get in if you are just joining the oil story, no matter what you might read here.