OT: Here's a thought for long term, I'm also looking at ETF's (Exchange Traded Funds) for energy long term. Oil may drop back this summer, that would be the time to buy, IMO. I hold the Fidelity Select Natural Resources in an annuity account since October and plan to hold 5-10 years.
Turning the drill bit
Commentary: Fidelity Select energy funds bank on drillers
By Sam Subramanian, AlphaProfit Investments
HOUSTON (AlphaProfit) -- Energy-related Fidelity Select funds loaded up on oilfield service companies while treading lightly on independent oil companies, according to recently published changes to the funds' top holdings.
Energy's been the place to be for equity investors. Three of the top four Fidelity Select funds for the 12-month period ended March 31 are energy-related. Fidelity Select Natural Gas (FSNGX: news, chart, profile) , Fidelity Select Energy (FSENX: news, chart, profile) , and Fidelity Select Energy Services (FSESX: news, chart, profile) all returned in excess of 40% during this period. Fidelity Select Natural Resources (FNARX: news, chart, profile) , which usually has a heavy slant towards energy, added more than 34%.
Surging commodity prices and robust demand for end-products have enabled companies in all segments of the energy value chain to prosper in unison. Integrated oil companies as well as domain specialists like oilfield service companies and refiners have seen a gusher of profits.
With oil companies flush with cash and reserve replacement becoming increasingly challenging, these companies have turned on their capital expenditure spigot.
Exploration activity has perked up. Companies have also boosted their production rates to benefit from high commodity prices. The impetus on growth from the drill bit has translated into rising rig utilization and day rates. This in turn has resulted in a boom for oilfield service companies.
Oil companies have also not been shy of acquiring reserves through buy-outs.
Earlier this month, ChevronTexaco (CVX: news, chart, profile) agreed to acquire Unocal (UCL: news, chart, profile) the ninth largest oil company in the U.S., for $16.4 billion in cash and stock.
Given the reported competition for Unocal's assets from the likes of China's CNOOC (CEO: news, chart, profile) , Italy's ENI (E: news, chart, profile) and Australia's BHP Billiton (BHP: news, chart, profile) , speculation has triggered on what the next deals will be. Names like Marathon Oil (MRO: news, chart, profile) and Occidental Petroleum (OXY: news, chart, profile) get mentioned as potential targets. Royal Dutch Petroleum (RD: news, chart, profile) and ConocoPhillips (COP: news, chart, profile) are viewed as potential acquirers.
After surging 55% and 29%, respectively over the past year, crude oil and natural gas prices have rapidly come off their highs over the past few weeks. For one, anecdotal evidence on a slowdown in the global economy is building. The International Energy Agency has lowered its forecast for world oil demand for the first time in four months.
U. S. inventories of petroleum products have increased at rates in excess of seasonal patterns.
Having raked in impressive gains, shareholders in the energy-related Fidelity Select funds may wonder how the funds' managers are positioning their funds for the period ahead. What companies and segments of the energy landscape do they find compelling enough to heavily weight their funds?
Perhaps we can gain some insight on this by comparing the recently reported top 10 holdings as of March 31 with those held at the end of the previous quarter.
GlobalSantaFe and Occidental Petroleum in favor
Among new entrants to the top holdings of energy-related Fidelity Select funds, GlobalSantaFe (GSF: news, chart, profile) and Occidental Petroleum (OXY: news, chart, profile) standout.
GlobalSantaFe, which provides offshore services with an emphasis in deepwater drilling, appeared in Fidelity Select Energy Services and Fidelity Select Natural Gas. The company recently priced a secondary offering of 23.5 million shares or about 10% of its outstanding shares. The proceeds from the offering will be used to buy an equivalent number of GlobalSantaFe shares currently held by Kuwait Petroleum.
Occidental Petroleum, an integrated oil company with exploration, production, and chemicals businesses, now figures among the top 10 holdings of Fidelity Select Energy and Fidelity Select Natural Resources. Commonly viewed as a take-over candidate, Occidental is well positioned to benefit from its reentry into Libya.
Heavy on oilfield services
The three energy-related Fidelity Selects as well as Fidelity Select Natural Resources show a striking concentration of energy service companies.
With Halliburton (HAL: news, chart, profile) entering the top 10 fray in Fidelity Select Natural Gas, oilfield service heavyweights, Schlumberger (SLB: news, chart, profile) and Halliburton, find a top 10 berth in all three of the energy-related Fidelity Selects as well as Fidelity Select Natural Resources.
Additionally, the composition of the top 10 holdings in Fidelity Select Natural Gas is notable for its energy services emphasis. In addition to Halliburton and GlobalSantaFe, Noble (NE: news, chart, profile) , Pride International (PDE: news, chart, profile) , and Weatherford International (WFT: news, chart, profile) join an already long list of energy service companies which includes Transocean (RIG: news, chart, profile) , Nabors Industries (NBR: news, chart, profile) , Schlumberger, and BJ Services (BJS: news, chart, profile) .
Further, the recently completed merger of National Oilwell and Varco to form National Oilwell Varco (NOV: news, chart, profile) gained favor as well. This combined company is a top 10 holding of Select Energy, Select Energy Services, and Select Natural Resources.
Smith International is one oilfield service company that falls out of Fidelity Select Energy's and Fidelity Select Energy Services' top 10 lists. Smith has had trouble unloading its low-margined Wilson International unit that distributes pipes and valves.
Light on potential takeouts
The energy-related Fidelity Select funds tread noticeably light on independents like Anadarko Petroleum (APC: news, chart, profile) , Devon Energy (DVN: news, chart, profile) , and Marathon Oil, all of which are rumored to be take-over targets.
Likewise, well-oiled acquisition machine, Apache (APA: news, chart, profile) and North American gas play, Burlington Resources (BR: news, chart, profile) fail to make the top 10 cut in any of the energy Selects.
The funds also did not find Unocal compelling enough to include as a top 10 holding prior to the ChevronTexaco's buyout announcement.
Optimistic on majors
Major oil companies BP (BP: news, chart, profile) , ConocoPhillips and Exxon Mobil (XOM: news, chart, profile) continue to be well-represented in the Fidelity Select energy funds as well as Fidelity Select Natural Resources.
By the same token, these funds do not find the restructuring activity underway at Royal Dutch Petroleum compelling enough to warrant a top 10 position. Ditto for ChevronTexaco, which had trouble reversing a string of year-over-year production declines.
Our take
The commodity price environment in recent times has enabled oil companies to add bountiful amounts of cash to their coffers. Reserve replacement however continues to remain challenging for most oil companies.
Access to most of the world's oil rich landscape remains difficult either due to political considerations or tax-related issues. Drilling costs have escalated. So too have the market values of public oil companies. These factors add to the challenge of cost -- effectively replacing reserves either through the drill bit or through acquisitions.
To keep a handle on reserve addition costs, cash-rich energy companies will as such, continue to balance exploration with acquisitions. By heavily weighting energy service companies and treading lightly on independent oil companies, the energy-related Fidelity Selects appear to prefer the value creation prospects offered by the former.
None of the energy-related Fidelity Selects or Fidelity Select Natural Resources rate favorably on AlphaProfit's proprietary ValuM Investment Process. Notwithstanding the possibility of a 'new paradigm' in oil prices, valuation metrics in the energy space appear fairly rich. They will likely contract if cycle average commodity prices turn out to be lower than current.
As such, we find the risk-reward ratio in the energy complex unappealing.
Sam Subramanian is managing principal of AlphaProfit Investments and editor of the independent AlphaProfit Sector Investors' Newsletter, which makes recommendations on Fidelity mutual funds. Subramanian owns Unocal call options. (alphaprofit.com)
Content found in The Guru's Corner is subject to the terms and conditions found in the Disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions. (Disclaimer)
