Oil Above $50 and Still Has Legs - Cramer

Includes: BP, BPT
by: Ockham Research

“BP, which is my favorite of the integrated oils right here, a stock I like so much they bought it for my charitable trust, you can follow along as I do the buying. It’s trading at the same price it was when oil was under $40. How on earth does that make any sense now that oil’s over $50? Especially when BP just said in a big analyst meeting that $50 crude was the magic number in terms of keeping its notoriously big dividend, juicy 8.3% yield intact. We’re at $50 now…

All right, now, how about a stock that gives you an even bigger dividend from the ride in oil? Something that should spring higher as crude gets more expensive, I’ve got one for you, BP Prudhoe Bay Royalty Trust, that’s a mouthful, but we call it BPT for you home gamers. It’s an energy trust. It has to pay out nearly all of its deposits to shareholders in exchange, it doesn’t pay taxes…

I just like Prudhoe Bay more because it’s a better play on higher oil prices, no natural gas keeps going down. Here’s the bottom line. The big story today, not AIG bonuses as much as we all hate those guys, is that oil’s back above $50. I think it’s headed $10 higher. I think you ought to look at BP and BPT as terrific dividend catch-up plays. They’re trading like crudes in the $30s.” --Mad Money 3/19/2009

As Cramer notes, crude prices have quietly and steadily risen over the last month more than 25%. This is in the face of weaker than expected storage data that suggests demand has continued to slow. However, the low crude prices of the last few months have led to serious declines in capital expenditures budgets for domestic oil companies and massive OPEC supply cuts. Oil prices have begun to ascend on the likelihood of an economic recovery, and the potential of having a serious supply crunch when that recovery takes place.

According to Cramer, oil has bottomed and this run up still has legs to run to $60 per barrel. If that is the case, then there are some oil stocks that have not yet begun to see significant appreciation from this crude appreciation. When there is a mismatch like we are seeing in oil stocks and you expect the trend to continue, then it is a great time to buy. Cramer’s two favorites, largely because of the exceptionally high yields, are BP (NYSE:BP) and BP Prudhoe Bay (NYSE:BPT). At Ockham, we have a Fairly Valued valuation on BPT and an Undervalued valuation on BP at current prices. Of course, these stocks have significant potential if oil continues to rise.

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