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By Robert Rapier on Mar 8, 2009 with no responses

Fortune Says Oil Stocks are a Bargain

I certainly can’t disagree with this:

Betting on big oil’s comeback

The article first argues that oil prices are unlikely to stay low for too long:

“Right now, the upsides in the oil sector far exceed the downside risks,” says Fadel Gheit, an analyst at Oppenheimer & Co. “I am absolutely convinced that oil prices will rise.”

After last year’s $100 free-fall rocked expectations, that kind of confidence is surprising. But Gheit is not alone; a strong consensus is growing for a price rebound. While crude isn’t likely to rocket back to the sky-high levels of 2008, even bearish analysts admit that oil can’t stay below $50 for long.

Those are of course my sentiments as well. I believe that long-term oil prices are going to see robust growth. Short-term it may run up to $150 and back down to $35, but my metric is always to ask where oil prices will be in 5 or 10 years. I believe they will be more than double where they are now, so I am leaving oil company stocks in my portfolio for the long haul, even if prices fall to $20 for a while.

They spoke favorably of the two oil stocks in my portfolio:

Other large stocks stand ready for a rebound. ConocoPhillips (COP, Fortune 500), whose shares have fallen 57% over the last year, has a price to earnings ratio of 9 versus Exxon’s 13. The company has a large amount of refining exposure, which hurt its bottom line in 2008 because of rising oil prices and slowing consumption.

Maran says that ConocoPhillips was unfairly penalized because of its partnership with Lukoil and its expulsion from Venezuela. Investors are worried about political risk – an overreaction, he says, and one that’s likely to change if more countries invite foreign companies in to revive their flailing economies.

Another big producer analysts say is undervalued is Petrobras (PBR), which discovered a series of mega-fields off of the Brazilian coast two years ago. Goldman’s Murti recently wrote that Petrobras “may be the best positioned major oil company in the world for the next oil price upcycle.”

It’s still unclear how much the company’s offshore find is worth, but Don Coxe, a longtime oil guru who now runs Coxe Advisors, likes what he sees. “Petrobras is a special story, and investors want to be a part of it,” he says. “They could find $25 billion worth of oil down there.”

ConocoPhillips has been a wild ride. Fortunately, I was in very early, so I am still ahead even after the steep fall. Petrobras has been all positive. In early December, it looked to me like an absolute steal based on their reserves (see Loading Up on PBR). Despite the rocky road for stocks in general lately, PBR has been the gem in my portfolio: Up as much as 70% since I bought it.

While I have taken losses just like most people, PBR has moderated the rest of my portfolio. And as oil prices rise back to the $60 range, I expect PBR will be double what it is now, and COP will be up 30-40% over today’s price.