The resilience in oil is duly noted. Whether it be today's bounce in the price of crude despite a buildup in inventories, or the lively stepping of the stocks in the sector, something's changed and changed for the better.
First, let's deal with crude. I speak to a huge number of oil and gas executives both on and off line, and they are adamant that there is actual demand for oil in the low $40s. No, not commodity-trader demand or hedge-fund demand, but actual users of petroleum. Two CEOs, Rich Kinder of Kinder Morgan (KMI) and Mike Mears from Magellan Midstream Petroleum (MMP), have been kind enough to go on record saying oil has overshot to the down side if it goes below $43. Dave Cote, CEO of Honeywell (HON), a company that makes refinery chemicals, believes oil should naturally live in the $50s. Why trust him? Because his company may be the biggest energy conservation enterprise on Earth, so he has to have a baseline forecast.
Plus, you may endlessly hear that Cushing, Okla., is backed up, the crude oil tank hub that so many pipelines feed to, so prices have come down. But that's a totally simplistic way of looking at the market. First, there are now many hubs and, more important, many refineries available that can take crude, so it's not as important as it once was.
Second, if we were really swimming in crude, what the heck are we still importing 7 million barrels a day for? While it is true that some of our refiners are obligated to take Saudi crude, we could shut down crude from, say, Venezuela or Mexico in a heartbeat. We aren't. We're refining it.
Now let's deal with the stocks. The most important consideration you need to know about the stocks is that the expectations are low, so low, in fact, that they could be beaten. Yes, I have a more bearish long-term forecast than most, because I think we are in for a long slog at these levels, give or take $10. I can see where some of these companies might actually beat the newly lowered estimates and there have been so many downgrades of these stocks that they really have wrenched the positives out of most of them.
More important, perhaps, is the behavior of the secondaries, the offerings that the companies have brought to market. The returns on them are stellar. Consider that Carrizo (CRZO), a really terrific company, priced a huge slug of stock at $45, which I urged you to buy. It's now at $51. Concho Resources (CXO), another excellent operator, offered $650 million worth of stock at about $112. It's at $119. Noble (NE) priced a deal at $47.50. It's now two points higher. Even Whiting Petroleum (WLL), in a totally desperate maneuver, sold a monster amount of stock at $30, killing any takeover attempt and diluting results from now until kingdom come, and that's up a couple of bucks from the pricing.
So, the disaster that was supposed to happen hasn't. Instead, you've made good money off these deals.
That's why I can only conclude that it is time to pick up an oil or a service company. We've been buying Schlumberger (SLB) for Action AlertsPlus.com and we want to be bigger in SLOB and the sector as a whole.
There are just way too many positives developing here. Sure, I am concerned that Iran does a deal with the United States and hits the market with a few more million barrels a day, but I think demand in Europe is picking up and the price of crude isn't stupid; there's a hefty discount already in place because Iran's expected to flood the market. I don't think it will. All in all, oil's the sector with the lowest expectations, and that may turn out to be precisely where you want to be.
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