Anyone privy to what oil company this guy is talking about in this essay???
COMMENT: Waiting for the Energy Balloon to Burst.
Dear A-Letter Reader:
When I was a kid in New England, my cousins and I spent more than a few
hot summer days with a water hose and a bunch of balloons. We'd play
games taking turns pumping water into the balloons; handing the rapidly
filling balloon to each other like a game of hot potato. Man, you'd
watch that latex stretch and stretch...knowing it was ready to pop any
second. If the balloon blew up in your face, you lost. We went through
a lot of balloons...we all got wet. And we all had fun.
Those halcyon days come to mind as I watch the oil market nowadays.
Investors and institutions alike are pumping more and more money into
energy stocks, chasing oil prices that are up 20% in a little over a
month and up over 110% in the last two years. The more money that gets
pumped into oil stocks, the more nervous the smart money gets -- because
man, that balloon is full to bursting. This is a lot less fun than
water balloons - it's downright nerve wracking!
And with oil breaking out to new highs, friends ask me if it's too late
to buy. After all, most Wall Street analysts still expect oil prices to
decline back below $35 per barrel in the next two years - and my friends
don't want to end up all wet! Here's what I tell them:
1) Wall Street analysts can go jump in a lake. Their firms often trade
the same stocks they rate, and they're out to make money for them, not
you. Mind you, I'm not saying oil is going to go straight up - anyone
who tells you he knows exactly where oil prices are going is either a
fool or a liar. In fact, a pullback in oil prices wouldn't surprise me
right now. After a run of 110%, some backing and filling is ordinary
and natural in a much bigger bull market. Still, I think the pullback
won't be nearly as deep as Wall Street expects. And correction or no
correction, the next big surge in oil prices could arrive with
tsunami-like surprise.
2) It's not too late to buy energy - IF you know what to look for.
Sure, many energy stocks have come too far, too fast, and they'll likely
get shredded when the bubble bursts. But there are some solid values
out there - stocks for which any sell off is just a buying opportunity.
Heck, if oil pulls back to $40 a barrel - taking energy stocks down
with it - I'm not just buying, I'm buying with BOTH hands.
My reasoning basically boils down to this: oil (and energy in general)
is in a long term uptrend with the potential for explosive moves. It's
simple math:
* The world produces about 84.5 million barrels a day of oil (bpd).
* The world consumes close to 84 million bpd of oil now and the
International Energy Agency (IEA) estimates global demand will hit
84.3 million bpd this year.
* If anything, the IEA is under-estimating. Just this past week, they
estimated China's oil demand should grow 7.9% this year. But as
recently as January, the IEA forecasted Chinese oil demand to grow by
just 5.7%. I think the IEA isn't facing reality - my own estimate is
it's more likely that China's oil demand will grow by 10% in 2005 to
about 7 million barrels a day.
* US oil demand is also rising. Only a 1% increase is expected in 2005.
But that adds up to nearly 21 million barrels a day - of that, 11
million barrels a day are imported, and imports are growing.
Add it all up - it seems clear to me. We're facing a real supply-demand
crunch.
Can OPEC pump more? Not much more. About all the excess OPEC supply is
in Saudi Arabia and some smaller Gulf states, and that doesn't amount to
a whole lot. And Indonesia's oil output is falling so fast it may have
to withdraw from OPEC. Iraq, meanwhile, is a civil war ravaged basket
case that will continue to import oil for the foreseeable future. And
non-OPEC producers like Russia? Oil production is actually expected to
fall as the Kremlin crushes budding capitalism with its sticky, ham
fisted fingers.
And remember how $40 was supposed to be the new floor for crude oil, and
$50 the new ceiling? Well, crude hit $54 last week. Meanwhile, OPEC
official Adnan Shihab-Eldin of Kuwait said that a major supply
disruption could send oil soaring to $80 per barrel.
I've been following the energy markets for years now, and I think we can
get to $60 pretty quickly. Heck, I'm pretty sure we can get to $80 even
WITHOUT a major supply disruption - it'll just take longer.
Still, you can see why investors hesitate. There are some energy stocks
that are inflating just like the water balloons of my childhood, pumped
bigger and bigger by an ever increasing stream of money. You can
practically hear these shares stre-e-etch as their prices expand. A
short-but-sharp correction in oil prices will burst those over inflated
stocks but good!
But here's the other side of the coin: What if oil takes off? You don't
want to be left on the sidelines. Instead, the smart thing to do might
to be to buy an energy stock that's still a good value. If you look
internationally, you can find some that look downright cheap. These
shares should continue to trend higher even if we see a pullback in oil
prices. And if oil really takes off, these shares could potentially
double - maybe more.
Why international energy companies? There are a couple of reasons. The
biggest one is that despite a resurgence in drilling, the amount of new
oil found in the US is disappointingly small. When they asked Willie
Sutton why he robbed banks, he replied: "Because that's where the money
is." Well, if you want to find oil, you need to look overseas - that's
where the oil is.
Let me give you an example - without naming names -- of one of the
bargains just waiting to be scooped up...This energy company is sitting
on an ocean of oil and has poured money into new exploration. It's
already striking "black gold" - its proved reserves jumped by double
digits last year. But this company isn't sitting on its hands. In fact,
it's cranking up capital spending by nearly 50%.
Most of the world's remaining oil is in hard-to-reach places. Sure
enough, this company is drilling for oil in a former Soviet Republic
that pretty much defines "middle of nowhere." But the company has an
ace up its sleeve - a pipeline to drastically cut transportation costs
for its oil.
The company has its challenges, including production problems and
geopolitical worries. But in my view, the geopolitical fears are
overblown, and its production problems are fading in the rear view
mirror.
Plus, revenues and earnings are rip roaring! All this, and the stock is
cash rich and the company is buying back its own shares. Now here's the
best part. It trades at less than 10 times trailing earnings. That's
about ONE FOURTH the industry average -- by this measure, making this
stock very undervalued indeed. Wall Street has overlooked this
international gem...but likely not for much longer. I strongly believe
this stock is a bargain.
Our own Eric Roseman has already pulled the trigger on the stock I just
mentioned for his Commodity Trend Alert subscribers; telling them how
to play it for maximum profit potential. And is this the only bargain in
the international energy sector? Heck no - it's just the beginning.
Eric is riding the surge in energy prices with select international
picks. One of his selections is showing open gains of 134% since it was
first recommended, another is up a stunning 391%. And Eric has all
kinds of commodity picks in his sights - energy, precious metals and
more.
SEAN BRODRICK, Editorial Director
The Sovereign Society Ltd.
E-mail: seanbrod@bellsouth.net
Rogue
