Study of Signals

[j.c.]

10 Stocks That Are Winners With $60 Oil
By Jim Jubak
MSN Money Markets Editor

Sixty-dollar-a-barrel oil. It's different this time.

And investing as if this was just another temporary hike in the price of a barrel of oil isn't going to cut it over the next decade. In this column, I'm going to give you my take on how $60 oil has changed the game for investors. And 10 stock picks for winning this new game.

It's not so obvious in the short run that the game has changed. In the short run, that $60 figure is just a price. But -- at least in the short run -- it's a price that moves the financial markets and the economy. When daily oil prices break below $60, stocks rally. And when crude moves strongly above $60 a barrel, stocks retreat. Check out the action on March 2 to see what I mean: A jump in the April crude-oil futures contract in New York to $63.36 that day helped the Dow Jones Industrial Average to a 28-point stumble.

Investors and traders are familiar with this kind of pattern and the factors -- such as seasonal fluctuations in inventory and market reaction to news -- that produce these moves. In the short run, although the price swings may be more extreme, $60-a-barrel oil is business as usual. In the long run, though, $60 oil is shorthand for a set of changes in the global economy, ranging from "peak oil" to the rising cost of finding and producing oil.

What $60 Means
To sum up, briefly:

Sixty-dollar oil is shorthand for an increase in the already substantial economic clout of oil-producing countries and a further decline in the independence of the global oil companies.

It's shorthand for rising costs of production, as oil-producing countries charge more for access to their oil and as it gets more and more expensive to produce oil from aging or unconventional fields.

It's shorthand for the growing importance of technology in the energy sector, as oil producers of all stripes struggle to wring oil out of old or damaged reservoirs or out of difficult-to-reach reserves -- and as every producer tries to control costs.

It's shorthand for increasing demand from China and India that will keep supply too close to demand for comfort. It will thus magnify every minor geopolitical ripple, such as a regional war in Nigeria, into a market-moving event.

It's shorthand for the increasing political uncertainty of supply, as the world becomes more and more dependent on oil and gas from countries such as Russia, Iran, Nigeria, Venezuela and Saudi Arabia that are each ruled by regimes that are themselves dependent on oil and gas revenue to maintain their power.

And most of all, $60 oil is shorthand for permanently high energy prices. Oh, maybe not at the $60 level if the world's economy slips into recession or if the world's consuming countries take strong action to reduce their demand for oil and gas. (Hey, don't laugh. It is theoretically possible.) But nonetheless, crude oil permanently priced above the $45-a-barrel point makes so many new energy sources and energy technologies viable investments.

10 for $60
Let me translate three parts of that $60-a-barrel shorthand into longhand and give you a few specific stock picks for each part of this new global economy.

Lower royalties and greater political stability give a big edge to North American energy producers. At a time when energy-producing countries such as Venezuela are raising the royalties that oil producers must pay on each barrel they pump to 30%, the U.S. is headed in the other direction. Thanks to legislation passed during the Clinton administration and never revised, oil companies pumping oil and gas from federal lands will get about $7 billion in royalty relief between now and 2011.

The problem, first exposed by The New York Times, is the result of incentives designed to encourage expensive deep-sea drilling in the Gulf of Mexico when oil was selling for less than $20 a barrel. But the royalty relief, which covers all drilling leases from 1996 through 2000, is still in place, even though oil is selling for more than $60 a barrel.

Add in the relative predictability of U.S. and Canadian law -- nobody is about to seize domestic oil projects belonging to ExxonMobil (XOM:NYSE - news - research - Cramer's Take) -- and domestic producers have a big edge on costs and reliability of production. This hasn't been lost on oil and gas companies: Encana (ECA:NYSE - news - research - Cramer's Take), the Canadian-based oil and gas producer, has been busy selling off foreign reserves in order to invest in North American projects, for example.

Big winners from this North American edge include Encana, Canadian oil sands producers such as Canadian Natural Resources (CNQ:NYSE - news - research - Cramer's Take), and companies such as EOG Resources (EOG:NYSE - news - research - Cramer's Take) that are tapping into the huge Barnett Shale formation in north central Texas.

Oilfield technology spending will rise faster than oil production. Spending money on technology makes sense in a $60-a-barrel world in two ways. First, spending money on technology can drive down overall costs. For example, 3-D seismic imaging costs more than older forms of geologic data collection and display, but it more than pays for itself in improved rates of oil discovery. Second, new technologies for oil production can improve the rates of recovery from existing fields and make production from unconventional formations such as oil shale, oil sands or tight sand possible for the first time.

Technology winners include Schlumberger (SLB:NYSE - news - research - Cramer's Take) in seismic imaging and oilfield production management, Grant Prideco (GRP:NYSE - news - research - Cramer's Take) in the development of intelligent drilling systems, Headwaters (HW:NYSE - news - research - Cramer's Take) in researching ways to turn coal into oil and gas, and Praxair (PX:NYSE - news - research - Cramer's Take) in the production of gases such as hydrogen used to increase production from aging fields.

The technology push from $60 oil isn't limited to the oil fields. A price above $45 is enough to power a search for new alternatives to oil and natural gas. Solar, ethanol, biodiesel, wind, nuclear and conservation are all candidates for the future energy mix. Which of these alternatives grab the biggest share depends on technology.

The biggest bottleneck in solar, right now, isn't a lack of subsidies or the price of solar-produced electricity, but the availability of enough silicon solar cells. With wind power, there's a race to make wind-turbine blades stronger, longer and lighter. In looking for a replacement for the gasoline-powered car, battery technology will be a key.

And I don't think you can count out the old-fashioned internal combustion car just yet. Better computerized controls, better transmissions and other technological improvements could make the current auto more than a match for any hybrid. A project by the Union of Concerned Scientists, for example, was able to rebuild a Ford Explorer to make it get 36 miles per gallon, a 71% improvement. I think we're looking at a golden age for materials science.

I can't do more than scratch the surface here -- I'll return to this topic more fully in a later column -- but some companies that deserve a place on your radar screen include DuPont (DD:NYSE - news - research - Cramer's Take), which has set a goal of making 25% of its chemical products from biological raw materials by 2010; General Cable (BGC:NYSE - news - research - Cramer's Take), which is producing new types of electric transmission cable to address a huge conservation opportunity (distribution losses in the U.S. electrical grid have climbed to 9.5% today from 5% in 1970); and Zoltek (ZOLT:Nasdaq - news - research - Cramer's Take), which makes high-performance carbon fiber used in autos and windmills to lower weight and increase strength.

Small Government
You may note that I've written about solutions to the global imbalance between oil supply and oil demand without mentioning a single action on this front by the U.S. government.

That's because, frankly, I don't expect this administration or any likely successor administration to do anything significant to address the situation. (The Clinton administration didn't do much on this front, either, so my disgust is resolutely bipartisan.) The forces of the status quo give too much money to too many politicians to make change likely. This is, after all, a government that hasn't been able to raise the corporate average fuel economy (CAFE) standards for passenger cars -- now at 27.5 miles per gallon -- since 1985.

Not that I wouldn't like to see the government act. I think government has a critical role to play in smoothing the transition from our current auto technologies to whatever comes next. And some mornings when the sun is especially bright, or the breeze especially fresh, I actually imagine that the government might act.

As an investor, though, I'm not counting on it.
http://www.thestreet.com/_tsctten/comment/investing/10272243.html