Wednesday, November 30, 2005

Peak Oil Now.

Kenneth S. Deffeyes: Join us as we watch the crisis unfolding.


The profits of major oil companies are piling up by the tens of billions of dollars per quarter. They are hoarding cash, buying back stock, and declaring dividends. They are not investing heavily in new facilities. If oil production has ceased growing and is about to decline, nobody needs new refineries, new pipelines, or new tanker ships. Most telling of all, the majors are not increasing their investment in exploration drilling. What I hear all around the oil patch is, "There are no good prospects out there." Of course, there is agitation to open areas for drilling that are currently closed. The implication of the plea is that additional drilling access will "solve" our oil problem. Every little bit helps, but it is incumbent on the companies to show that these are something more than a little bit.

What can we do? I have three categories: actions that we can take immediately, methods whose engineering is already done, and futuristic dreams.

Immediate: A 55 mph speed limit (they’ll hate me in Montana), teach the kids to turn out the lights when they leave a room, open the house windows for cooling or heating when the weather is not extreme.

Engineered: Nuclear power, high-efficiency diesel automobiles, wind turbines, coal gasification (with the carbon dioxide sold for enhancing oil recovery).

Dreams: Hydrogen fuel cells, alcohol from corn, solar cells. Don’t pin your hopes on a Manhattan Project or an Apollo program.

I see no reason to retract my Thanksgiving, 2005 prediction.

Tuesday, November 29, 2005

Energy Stocks For The Long Run.

Jeremy J. Siegel, professor at the Wharton School and author of Stocks For The Long Run, weighs in, suggesting that energy stocks are not in a bubble and still have room for appreciation.

Kipplinger's Personal Finance: Black Gold Still Glitters


Nuts! That's my response to those who say the recent run-up in energy prices is a bubble. Prices for oil, natural gas and oil derivatives, such as gasoline, will remain high for some time. With rising demand worldwide, we've ascended Hubbert's Peak, named for geophysicist M. King Hubbert, who predicted that oil production would peak around the year 2000, causing the world economy to deal with a diminishing supply of black gold.

Does this spell disaster for the U.S. economy, hooked as we are on cars, air conditioning and other energy burners? The answer is no, although there certainly will be pain in the short run. I believe that retail Christmas sales could be soft, and I estimate that falling consumer spending could pare as much as two percentage points from economic growth in the fourth quarter.

But in the long run, the outlook is rosier. Because the recent price surge has hit us where it hurts, we have more time to solve the energy crunch. Remember the spurt in energy prices in the 1970s? That caused a burst of conservation and efficiency improvements that lowered the energy content of U.S. output by 50%. So to produce a dollar of economic output, we need use only half the energy we did a generation ago. That will happen again.

What does this mean for the average investor? The prices of oil and natural-resources stocks, as well as exploration and technology-oriented firms, are already up sharply. The energy sector now makes up 10% of Standard & Poor's 500-stock index, versus just 6% a few years ago. But that is still far shy of the 30% reached during the energy crisis of the 1970s and early 1980s.

We won't see a 30% share again, nor should we. Energy stocks, especially those related to oil exploration, became dramatically overpriced in the '80s and subsequently collapsed (the large integrated oil companies, such as ExxonMobil, did much better).

But I don't believe energy stocks are overpriced, as a group. Earnings are high and will remain high as long as oil prices stay firm, which appears likely. You should not dramatically overweight the sector, but it is not unreasonable to hold 10% to 20% of your stock portfolio in energy and natural resources.

Wednesday, November 16, 2005

Tis the season. Winter's Chill May Warm Energy Stocks.

If you look at this chart from the article, it looks like, on average, the time to be in energy service stocks is December 1 through April 30.

Which corresponds pretty well with the "Sell in May, and go away." seasonal timing theory that some people use for the market as a whole.

Amusing, but, as they say, your mileage may vary.

Tuesday, November 15, 2005

Always a good time at The Oil Drum.

A great interview with Matt Simmons, an article about a petroleum engineer arguing Matt's wrong about Saudi Arabia, and a further article from Resource Investor that goes into greater detail.

A rig shortage till 2010? Thinking oil service?

MS: We won't bring on that new capacity, we're out of drilling rigs. It's too bad people didn't realize we're running out of rigs and we won't resolve the rig problem until well after 2010. But to call it a field-by-field bottoms up and then just have a notional idea... if a field does not have a name today, it won't be done by the end of 2009. We just would not have time. The whole thing is typical of the analysis they did when they assured all of their clients that we had abundant robust natural gas, all these pessimists about natural gas are just flat wrong. And they did a bottom-up study then too. And they did the bottoms up story then, too. And they turned out, unfortunately, to be as wrong as me promising that there is a Santa Claus, and you finding that there wasn't.

Raising GM Rating.

I'm raising General Motors (GM) from Dead Man Walking to Bye Bye Bye.

Why is this thing in a death spiral?

Let me count the ways:

- Company perpetually unable to combat, nee, even contain it's shrinking market share.

- Demographics of GM buyers versus it's competitors are not promising.

- Product is improving, but the competition continues to remain firmly a generation or two ahead.

- Junk debt rating means no cheap financing, thus dealers are hamstrung. GM can only continue to sell cars by selling them cheaper and cheaper, while it's costs inexhorably rise.

- The "healthy" part of the business? GMAC mortgage lending.

AP: GM Bankruptcy Fears Rising on Wall Street.

Thursday, November 10, 2005

Boone Pickens says prices headed lower.

Dallas Morning News: Pickens says prices headed lower.


One of the oil market's most prominent bulls, Boone Pickens, has turned bearish – at least for the coming months.

Mr. Pickens said Wednesday that oil is headed toward $50 a barrel and natural gas may have hit its peak even before the winter arrives.

A weaker economy and mild weather so far this fall could translate into falling demand. Though Mr. Pickens doesn't expect a recession in 2006, "it's not going to be one of our better years," he said.

Mr. Pickens, who manages more than $2 billion in investments at his Dallas-based BP Capital, has accurately predicted trends in commodity prices since oil was around $40 a barrel in the spring of 2004.

His latest projection, that oil would hit $70 before $50 again, proved true in August when crude reached $70.85 a barrel.

Oil for December delivery fell 78 cents Wednesday to $58.93 on the New York Mercantile Exchange.

Demand should pick up in the next nine to 12 months, pushing oil back toward $60 a barrel, Mr. Pickens said.

Over the long term, Mr. Pickens remains bullish on oil because of what he sees as a peak in global oil production.

"I don't think you can get supply much beyond 85 million barrels," he said, which is just above the daily global oil production today.

Tuesday, November 08, 2005

For Whom The Bell Tolls.

MarketWatch: Bell 'Toll-ing' for housing market?

This is kind of an obvious observation, but large plots of land are generally only available these days further out from most cities, thus many of these homebuilders are building where length of commute (and thus gasoline prices) becomes a factor. Then add in the size of these new homes; say, I wonder how much it costs to heat or cool that?

So with those thoughts and higher interest rates to boot..

Charles Maxwell's latest.

From 321 Energy: The blood of capitalism -- oil.


Next, what about the blood of capitalism -- oil? I just received a report from my old friend, Charlie Maxwell (Maxwell@Weeden). Charles is one of the top, of not THE top, oil analyst in the nation. Here are some of Charlie's latest comments.

"Today, we are in a new period of tightening oil supplies along with correspondingly-high oil prices. Our situation is now seen to have its principle origin in geologic realities that have been only recently recognized. This 'energy crisis' may not go away in a year or even in five years. Perhaps not in my lifetime. Crude oil is more difficult and more costly to find every year because easy-to-access oil has already been exploited. Demand around the world keeps rising, some 1.5% to 2.5% per year. We are using 31 billion barrels annually now, and finding 8-10 billion barrels at the most.

This is the old crisis story -- made permanent. We are in a new era, all right, and I project that one will support a continued average WTI (West Texas Intermediate)crude oil price above $50 per barrel going out in time. And I anticipate prices will move (generally) higher until we reach Hubbert's Peak perhaps in the 2015-2020 period.

"Closer to home, what should we expect as a pattern of oil price over the next five years? It can only be a guess. My rounded WTI numbers are set out below. A = average, E = estimate.

2003A $31
2004A $41
2005E $57.
2006E $54.
2007E $56
2008E $62
2009E $68.
2010E $75.

"No forecaster can be confident about figures as exact as the ones displayed above. But they are presented, nonetheless, because they constitute what I consider to be a likely trend. I assume that by 2015, WTI oil will be in the $130-160 range. Oil will be too valuable by then to be consumed in many of the common tasks that it is called on to perform today.

"I see energy conservation as not just a way out of our energy dilemma, but at least for the next 20 years, the main way out. No other "source" of energy is proportionately large enough or flexible enough to handle the size of our problem. . . . Crude oil is our largest source and about 39% of our country's energy needs are met through oil products derived from it."

Saturday, November 05, 2005

Big Oil May Heat Up Again This Winter.

I've generally liked what I've heard from Paul Sankey when I hear him on TV or the radio, so I'm willing to give his call here a shot.

Barrons: Big Oil May Heat Up Again This Winter.

Deutsche Bank Securities
60 Wall St.
New York, NY 10005
(Tel) (212) 469-5000

WE PREDICTED UNDER-PERFORMANCE and got a stampede for the door. A vicious rotation made our prediction of a 10% fall in integrated oils between October 1st and December 5th come roaring home in a flat month.

This October just passed was the worst October for integrated-oil stocks performance since "Black" October 1987. If you are feeling a little beaten up, you should be – the stocks fell 8% in a month, with the overall oil group losing around $100 billion of value.

Now we are likely to drift until snow arrives, at which point we expect a ripping performance from the oils into the January fourth quarter earnings-per-share reports.

After a third quarter which saw no impact on our earnings-per-share numbers for 2006 for any name, we have revisited valuations and investment cases.

Particularly, in this note we highlight net asset values (NAVs) that are in line with current equity valuations. That is, the integrated oils are now trading in line with break up value. Corporate raiders should take note. More simply put, the group is discounting $36 oil against a $60 strip. Buy.

Some of the fundamental reasons that the oils sold off:

1) Concern that we highlighted on the arrival of Hurricane Katrina, that high prices would destroy the demand driver which has been the essence of the oil bull call. The international demand case may well be more important, and anyway we are modeling weak demand in our bullish outlook. We only look for 0.5% gasoline demand growth next year, suggesting 1% gross domestic product growth.

2) Windfall taxes that would take away excess profit if demand does not collapse. We do not see windfall taxes as likely although pressure will remain. Watch for a hearing next week called by Senator Frist.

3) Rotation from an oil group, which was up 40% year-to-date with the market, is down 7% by the start of October. The snowball of money leaving the sector has now bottomed out. Major oil stocks are at or around their break-up value. Chevron, ConocoPhillips, Marathon and Hess are now all potentially worth more broken up – trading at or below NAV. We recommend investors buy these under- valued names before the first snow of winter.

Nearly 70 degree weather in New York should continue to pressure the commodity for the next fortnight. Arguably the equities have predicted this move already. We are raising Hess and Marathon to Buy as we expect 20% gains in the next 12 months for the integrated oil group.

Top picks are Occidental Petroleum, ExxonMobil, and ConocoPhillips. These are the names with the highest leverage to high oil prices (yes, ExxonMobil) and best managements.

-- Paul Sankey