Friday, December 30, 2005

Play it again, Sam.

Sam Stovall, Chief Investment Strategist at Standard & Poor's, appeared on CNBC a few minutes ago and suggested that overweighting the prior year's most successful sector often leads to further outperformance over the S&P 500 the following year. The top performing sector in 2005 was... hmm, let me take a look here... hey, whaddya know - energy. His statistics suggest this outperformance occurs in 7 out of 10 years, or 70% of the time, which is a rather impressive track record.

I have looked at this also as a trading strategy, and I agree with him.

There is one key though: You must avoid a sector that has completely overheated and is about to crash land.

To be perfectly clear, I am not sure if energy is an entirely safe bet for 2006 based on Sam's idea. Energy has done well over the past 3 years, and very significantly outperformed in 2005. On the other hand, many people are still quite skeptical of the energy story and are underweighted (and may need to buy..). Thus, we may have room to run until everybody thinks energy is the place to be. Keep an eye out for that, it's when you'll know to sell everything.

The key, I think, is to watch your energy holdings very closely and not be afraid to take some off if they trade poorly in 2006. You can always buy them back if you were early.

Additionally, Tom McManus of Bank of America, who had recommended energy at the beginning of 2005, feels that energy may still have some life left in it. He is rather bearish on the rest of the market though.

Have a healthy & happy New Year.

Thursday, December 29, 2005

Room to Rally.

ICON Energy Fund manager J.C. Waller appeared on CNBC this morning and offered his opinion on energy stocks.

Currently, Mr. Waller believes energy stocks in general are trading at 16% below what he considers fair value, and thus his view is that there is "room to rally".

Drilling down (so to speak..) he believes that the most promising sector of energy is oil and gas drilling, which he believes is trading 36% below fair value. He noted that this sector has also shown recent price strength, particularly over the past six weeks. Thus, based on this combination of value and strength, he believes oil and gas drilling to be a "good place for an active bet".

He highlighted three names in oil and gas drilling which he feels are not being recognized as bargains:

DO - believes it to be 38% under fair value
NBR - he has a fair value target of $97

Monday, December 26, 2005

Energy Service in 2006?

When I read things like this, I think so.

MSN: Stocks for the 2006 commodities crunch

Monday, December 19, 2005

Arjun Murti Eyes the Red Pill.

Bloomberg: Goldman's Murti Says `Peak Oil' Risks Sending Prices Above $105.


Goldman Sachs Group Inc. analyst Arjun Murti, who roiled oil markets in March by saying crude may reach $105 a barrel, now says that may be conservative if the ``peak oil'' theory is right and world supplies are running out.

The belief that the world's oil supply is close to an irreversible drop is no longer ``on the fringes'' of the market, said a research report by New York-based Murti, who forecasts oil of $50 to $105 a barrel until 2009. UBS AG analyst James Hubbard, a former oil engineer at Schlumberger Ltd., said an inevitable decline in supply will start sooner and be worse than expected unless investment increases for many years.

A jump above $105 a barrel ``is possible if we don't invest the right amount of money,'' Hubbard said in an interview in London. ``There will be a peak in production earlier than expected, and that post-peak decline will be more dramatic than currently assumed unless there is a sustained increase in investment in oil and gas production, greater consumer efficiency and alternative energy sources.''

Goldman's Murti in March skirted the peak oil debate. In a report last week, the analyst said it's something to monitor.

``It is possible that the peak oil theorists are correct,'' he wrote. ``If so, we think that the duration and magnitude of energy commodity price increases would be likely to far exceed what we are contemplating.'' He couldn't be reached for comment.

Without a peak in production, Murti expects the price of New York oil to fall to about $35 a barrel in New York between 2010 and 2014. That matches forecasts from Schroders Plc for $35.50 by 2010 and is lower than Merrill Lynch & Co. predictions for $40 to $45 by the end of the decade.

The debate and high prices are contributing to an increase in investment in new technologies that will help keep oil flowing, said UBS's Hubbard, who wrote in October that some 3 trillion barrels probably remain to be pumped.

Murti ranked third last year among researchers who cover oil and gas companies, according to Institutional Investor magazine.

Goldman, the second-biggest U.S. securities firm, estimates about $50 billion is invested in its commodity index, where crude oil has largest weighting. The bank's view is that oil will average $68 a barrel in New York next year. Prices may stay close to $60 for ``three to five years'' before falling to ``$45 at the most'' by 2010, Jeffrey Currie, the bank's head for commodities research in London, said in August.

Tuesday, December 13, 2005

Four more years! Four more years!

MSNBC/Reuters: Goldman Sachs: Oil prices to stay high for years.


LONDON - Oil prices, which hit record levels this summer, have entered a "super spike" phase that could last for four more years as global demand booms and supply growth slows, Goldman Sachs analysts said on Tuesday.

"We disagree with what appears to be a growing consensus that crude oil prices reached their peak levels earlier in 2005," said the firm's Global Investment Research.

The analysts said oil demand remained resilient and supply growth lacklustre, prompting them to keep their average U.S. crude price forecast for next year unchanged at $68 a barrel.

They predicted oil prices could see 1970s-style price surges to as high as $105 a barrel during this period.

"With WTI oil prices on-track to average about $57 a barrel in 2005, we think the past phase will be remembered as the first of what could be a four-to-five-year 'super-spike' phase," their report said.

Goldman Sachs first mentioned a super-spike phase in March, five months before U.S. oil prices skyrocketed to a record $70.85 a barrel. Prices have since eased.

U.S. oil futures on the New York Mercantile Exchange have averaged $56.59 so far this year.


The bank expressed doubt that OPEC producers, which supply a third of the world's crude, would be able to quench booming demand.

"It is the seeming insurmountable challenge of OPEC's needing to add real new capacity on a just-in-time basis that gives us so much confidence that we are in the super-spike phase," it said.

OPEC, which has been pumping at the highest rate for 25 years, is set to boost its spare capacity to 3.1 million bpd by the end of the 2006.

Despite hurricanes, high fuel prices and increased conservation, energy consumption in the United States remains strong, as does China and India, the bank said.

"Ultimately, we agree that the energy bull market will roll over once demand destruction really begins," it said. "We simply do not believe we have arrived at that point."

The International Energy Agency, the West's energy watchdog, estimated world oil demand ould grow at an average of 1.8 million to 2.0 million barrels per day through 2010. Last year's demand growth of 3 million bpd was the highest for a generation.

BusinessWeek: Where the Action Is in Energy.


"A good buying opportunity for many investors." That's what Standard & Poor's analyst Tina Vital sees in many oil and natural gas stocks at the moment.

Q: What portfolio weighting does S&P currently recommend for energy stocks?

A: The current sector emphasis for energy is market-weight. Energy as a segment of the S&P 1500 is 9.9%. It had broken 10% some months ago, and several years ago had been down around 6%. So we've seen it increase as a percentage as energy becomes a greater portion of our market. It's S&P's opinion that energy still has legs.

Q: Tina, can you give us your top picks? You mentioned a few earlier.

A: Yes. Starting with the integrated oils, my 5-STARS picks are Chevron, Conoco, Exxon Mobil, Total (TOT ), a French company with big plays in frontier regions, and Valero Energy (VLO ). These integrated oils all offer dividend rates of 2% to 3%.

Now, as far as the exploration/production companies go, there are 5-STARS ratings on Canadian Natural Resources (CNQ ), Chesapeake Energy (CHK ), Devon Energy, and Occidental Petroleum (OXY ). These four E&Ps have dividend rates of between 0.5% and 2%.

We also have some pipeline companies that we're very bullish on, having a 4-STARS rating on Amerigas Partners (APU ), Buckeye Partners (BPL ), Enterprise Products Partners (EPD ), Kinder-Morgan Energy Partners (KMP ), and Magellan Midstream Partners (MMP ). All of these pipeline companies that Roy Shepard covers have dividend rates of 6% to 8%, very high.

Last but not least, there are three 5-STARS oil and drilling companies: GlobalSantaFe, Nabors, and Superior Energy Services. Only GSF has a dividend, around 1.3%.

LOBG Quiz.

When Fadel Gheit of Oppenheimer & Co. was quoted as saying "It's an excellent deal, a fantastic deal," he was referring to:

1.) The fact that you bought lots and lots of energy stocks in 2004 and 2005.

2.) The Tom Cruise / Katie Holmes hookup, of which he is a huge fan.

3.) ConocoPhillips purchase of Burlington Resources.

P.S. More mergers to come?

Thursday, December 08, 2005

Wanted: Cheap, disagreeable investors for LTIR.

NY Times: Today's Energy Stocks May Well Be Tomorrow's.


"Over the near term, I think it's going to be kind of a struggle because we have a lot of uncertainty in the marketplace in terms of G.D.P., consumer demand, geopolitical considerations, rising interest rates," James D. Wineland, manager of the $4 billion Waddell & Reed Advisors Core Investment fund, said of the sector's share-price performance.

But he pointed to the continuing imbalance of supply and demand and added, "If we look beyond that, I think there's a huge future for energy stocks because this is an issue that isn't going away." He has made a big bet on that future, placing about 20 percent of the fund's assets in energy, double the market weighting.

David Spika, investment strategist at Westwood Holdings in Dallas, an institutional portfolio manager with large energy holdings, has similar hopes for the sector.

"Even though we have seen a significant decline in crude, the structural supply-demand imbalance remains," he said. "Obviously you have to expect corrections from time to time."

A chronic imbalance would set energy apart from other commodities, whose prices tend to fall over time when adjusted for inflation, said Jeremy Grantham, chief strategist at the portfolio manager Grantham, Mayo & Van Otterloo. While ephemeral factors can cause cyclical gluts and scarcities of commodities, new production methods help to ensure that supply outstrips demand over the long haul - except in the case of energy, Mr. Grantham has come to believe.

"We're gung-ho about regression to the mean, so when prices rise a lot, we are expecting to go short and underweight," he said about most commodities and the stocks of their producers. Since the shortages of the 1970's, the average price of a barrel of oil has been $36 in today's dollars. Mr. Grantham said he expects the average price to keep climbing as what is left of the earth's supply of oil becomes harder to extract.

"I'm offering oil as an exception to the principle" of mean reversion, he said. "Having hunted high and low and never found a major asset class that went through a paradigm shift, I think oil is it."

If a paradigm shift is occurring, the investment masses are barely noticing. Tim Guinness, who manages the Guinness Atkinson Global Energy fund, among the best-performing equity funds this year, with a return of 61.4 percent through Thursday, points out that energy stocks as a group have doubled since crude oil reached a trough in 1998 at less than $10 a barrel.

At the bottom, he recalled, energy accounted for a mere 6 percent of the valuation of Standard & Poor's 500-stock index, compared with 27 percent at the peak of the oil boom in the early 1980's. Today, with crude around $60, energy accounts for less than 10 percent of the index. Who's a Contrarian? Not Me!


The pilot of Fidelity's huge Contrafund excels by focusing on companies with visionary executives.

With little fanfare, Fidelity Contrafund overtook its sister fund, Magellan, sometime this past September to become the largest stock fund in Fidelity's vast stable. It should have come as no surprise. In contrast to Magellan, Contra has prospered, despite assets that now exceed $56 billion. The record is compelling: Contra easily topped Standard & Poor's 500-stock index over the past 15 years. What's more, it outpaced the index in nine of the past 15 calendar years, including 2005 to October 1. An investment of $10,000 in Contra 15 years ago would be worth $97,400 today, versus $54,000 for Vanguard 500 Index.

We dwell on the 15-year benchmark because the man behind the sterling record, Will Danoff, celebrated his 15th anniversary at the fund's helm in September. A salty product of Harvard and the Wharton School, Danoff claims he's no contrarian -- that Contrafund is just a name. So what accounts for his stock-picking success? And how will he keep Contra moving forward under the weight of all those billions of dollars? For the answers, listen in on our conversation, conducted one fine autumn afternoon above the streets of Boston's financial district.

Q: Where are we in the energy-stock cycle?

A: It's still early. Maybe we're in the fifth inning. We're starting to see the industry raise money, and we're starting to see some speculative deals, such as Norsk Hydro buying Spinnaker. But we haven't yet seen full capitulation by institutional investors. That's when people say, "If you don't own energy, you underperform, and if you underperform, you lose your job."

Q: Now you're starting to sound like a contrarian again.

A: My style is to own what I would call best-of-breed companies. So I'll be slightly contrarian when I move to de-emphasize energy and to emphasize groups that are improving, but I think we're still in the improving stage for the energy sector. Until you see irrational capital spending in the industry, I think we're okay.

Everyone's talking about how big-capitalization stocks are due for a comeback. The surprise may be that the stocks to own are ExxonMobil and Chevron, which are underowned, rather than General Electric and Microsoft, which everybody and his brother owns.

Q: Who has the vision in the energy business?

A: EnCana, a Canadian exploration-and-production company, is one of my biggest holdings. In May 2000, I show up at a meeting of Alberta Energy management. So I start talking with the CEO, a guy with gray hair who looks very experienced. I ask some basic questions, such as "How do you make money in the energy business?" and he starts talking about how it's a capital-intensive business. You want long-life reserves because if you're going to plunk down $1 billion up front, you want that $1 billion to work for you for 20, 25 years. Anyway, I liked the guy -- his name is Gwyn Morgan -- and the company had some good growth prospects, and I bought a little stock. Eventually, Gwyn merges Alberta with PanCanadian, which had this massive acreage in Canada, and creates EnCana. Gwyn is a visionary explorer who's looking for elephantine energy fields that allow him to leverage all his capital and his expertise. He does another acquisition and another, and now he's sort of on top of the world as gas prices go through the roof.

P.S. LTIR = Long term investment relationship.

Investment Advice from Kenneth Deffeyes.

And Warren Buffet too, the sneaky &*%^. You thought he bought PTR only for the currency play, didn't you? (Me too..) World oil production doom scientist decries editors.


PASADENA - There it was, laid out in a simple linear graph for everyone to see: the end of the age of oil.
For anyone who fears oil companies run the White House, fumes at the thought of drilling in the Arctic National Wildlife Refuge or deems global warming doubters deranged, there had to be something perversely gratifying about the picture of doom on display Thursday at Caltech's Beckman Auditorium.

"The peak of world oil production is happening right now," Ken Deffeyes, professor emeritus at Princeton University, confidently declared. "Here is the most important story since the Industrial Revolution."

And when Deffeyes said "right now," he meant it.

According to his calculations, world oil production reached its peak on Thanksgiving Day 2005, and now starts on a steady decline until it reaches zero near the end of the century. Deffeyes, a geologist, bases his conclusions on a production chart developed by M. King Hubbert, a Shell Oil Co. geophysicist who, in the 1950s, accurately predicted the rise and fall of U.S. oil production.

Despite the assuredness with which Deffeyes delivered the news, he is not without his critics.

The U.S. Geological Survey, for one, says Deffeyes has underestimated the world oil supply by roughly one trillion barrels -- roughly equal to the supply of oil that has been pumped so far.

Even among the scientists who accept the Hubbert system, there is disagreement about exactly when the production peak will hit. And there are others who dismiss the entire method as unscientific, unreliable hogwash.

"When you assume changes are due simply to geology, you're going to get it wrong," said University of Texas politics professor Michael Lynch at a conference last year.

One man who attended the lecture Thursday panned Deffeyes' use of a linear graph to chart the production peaks, saying a logarithmic scale is much more accurate.

"Your charts are factually misleading," the man charged.

But Deffeyes remained steadfast. He went so far as to attack news articles for including critical voices, saying attempts at being fair have obscured the truth.

"Editors are one of the great enemies of the people right now," he said.

David Goodstein, Caltech provost and professor of physics, defended the Hubbert method, calling it scientific and devastating in its implications.

"The halfway point is going to be very soon," Goodstein said. "So very soon we are going to start running out of oil."

Goodstein is the author of "Out of Gas: The End of the Age of Oil," a book that challenges the notion that markets will drive the transition to alternative fuels. He has proposed a new Manhattan Project to find a suitable substitute for fossil fuels.

Deffeyes agrees that the world must prepare for the change-over to avoid mass shortages and possible armed conflict. He said the world cannot rely on so-called "blue sky" technologies, such as hydrogen-powered cars, biodiesel or a Manhattan Project.

"How about some old technology?" he asked.

To the dismay of some alternative-energy acolytes, Deffeyes endorsed nuclear power, coal gasification and high-efficiency diesel as intermediate options to wean the world off oil dependence.

"We are going to have to reconfigure things and reprioritize things," Deffeyes said, although he noted he has personally invested in PetroChina Co. in case some new oil deposits are found in the South China Sea.

"That is the last major place on Earth that has not been explored," he said.