News From the Energy Patch
The latest EIA data shows that inventories continue to build modestly. Days inventory remains below the long-term average but increased slightly from the previous week and may be at a critical technical juncture. Continued growth in days inventory will result in a breakout from the recent downward trend. A pullback could indicate that the short-term rising trend will be as illusory as that of the late 1990’s.
Meanwhile, the PPI data showed that refining costs are rising at a 45% pace year/year and remain in a rising trend.
And oil drilling equipment is also getting more expensive:
Over the weekend, the New York Times published an article exploring whether there would be more mergers and acquisitions among drilling companies following Anadarko’s double-takeover of Kerr-McGee and Western Gas Resources. The article says:
One who sees the deals as an aberration — and such skeptics are hard to find these days on Wall Street — is Benjamin Dell, oil and gas analyst at Sanford C. Bernstein. “After every deal, everyone jumps on the bandwagon without actually thinking it through,” he said.
The Anadarko deal was “an expensive mistake” and did not set a benchmark for industry valuations, in Mr. Dell’s view. “Often you see a lot of M & A activity when people believe the current environment is sustainable,” he said. Mr. Dell says he does not believe that current oil prices are sustainable, but he is in the minority for now.
Bulls argue that energy stocks are undervalued because they reflect the fearful assumption that oil will fall well below its current price — which closed on Friday above $77, amid fighting between Israel and Hezbollah in southern Lebanon. “The stock prices are not reflecting the underlying commodity prices,” Mr. Kilduff said.
Oil, meanwhile, is becoming harder to find even as demand rises from China and other industrializing nations.
“It’s just cheaper to buy oil than to drill for it,” said David Dreman, chairman of Dreman Value Management. A self-proclaimed contrarian who often resists prevailing investment currents, Mr. Dreman is willing to be swept along on this wave. “I’m not a contrarian on this,” he laughed.
There is no need to be a contrarian all the time. Sometimes the consensus is right. Sometimes contrarians are so early they might as well be wrong, as they were from 1996-2000 on Internet stocks. Which brings us to a comment made by Roger Nusbaum:
Here is a quote in Barron’s from Bill Nygren about commodities and oil.
“Had we possessed perfect foresight and seen the changes in supply and demand that caused commodity prices to increase, it would have made sense to own those cyclic names.”
Apparently his funds either did not have enough or did not have any exposure. He goes on to say…
“We don’t believe the commodity price surge of the past three years will recur,” and he expects that it “will likely reverse somewhat.”
Why would anyone expect he would be correct now after being so wrong before?
People have been sure that oil would peak at $40, then $50, then $60, then $70… The trend continues to not be their friend. The fact is, to access large new supplies of oil or equivalent alternatives is both expensive and time consuming. Meanwhile, demand continues to grow at a steady pace. Over the next year the odds appear better for the trend continuing than for a reversal. Forbes says we aren’t even yet at record prices:
What you’re not hearing: Even at today’s prices, crude oil is still not as expensive once inflation is taken into account as it was in the early 1980s, at least not yet.
The price would have to top $87.70 for it to be a high in real as well as nominal terms for modern times.
In other news, Jefferies & Co. analyst Stephen D. Gengaro raised his 2006 earnings estimate for Watch List company Helix Energy (HELX) to $3.45 per share from $2.80 per share and boosted his price target on Helix’s stock to $58 from $45 following Helix’ recent purchase of independent oil and gas company Remington Oil & Gas Corp.
Russia’s energy and industry minister said Saturday that after months of delay, the list of foreign partners for a giant liquefied natural gas project in the Barents Sea could be announced in October. Our Watch List is well positioned for a share, with three of the six short-listers on our list (NHY, STO and COP.)
Currently in the shortlist to partner Russia’s OAO Gazprom (GSPBEX.RS) are the U.S.’ Chevron Corp. (CSX) and ConocoPhillips (COP), as well as Norway’s Statoil ASA (STO) and Norsk Hydro ASA (NHY), and France’s Total SA (TOT).
ConocoPhillips, Anadarko Announce New Satellite Discovery Near Alpine.
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