Three Reasons to Own Oil E&P Companies: Update

In the last post I wrote on Seeking Alpha, I wrote 3 fundamental reasons to be long oil Exploration & Production stocks. I have an update to that post.

Thursday, June 11th, the International Energy Agency (IEA) "raised its 2009 world oil demand estimate for the first time in nine months but cautioned that the move does not necessary point to the start of a global economic recovery. In its latest monthly oil market report, the IEA adjusted its 2009 demand forecast up 120,000 b/d as a result of stronger-than-expected OECD data from the first quarter of the year."

In case you didn't read my most recent post on the 3 fundamental factors to be long oil E&P companies, I will fill you in:

1. OPEC cuts are more than enough to offset declines in demand even by the most bearish of demand forecasts - which were just revised higher by 120,000 barrels per day by the IEA Thursday.

2. Weak dollar doctrine will fuel commodity inflation in the United States.

3. Demand is stabilizing for consumer fuels. Global growth in demand will set in and the revision to the IEA forecasts could be the start of just such a trend.

Disclosure: I am long: PCU, VALE, NUE, PSEC, HERO, ETV, and VLO (Calls). I am short: SPY

Comments

[Shale Gas:]

What are your thoughts on natural gas? Many have suggested buying UNG.

Jun 12 08:46 AM

[Daniel Moser:]

Nat gas is a different story from oil. There is a glut of natural gas supply in the United States and it is likely to get worse with LNG imports to the U.S. tentatively rising.

Even if you are bullish nat gas in the long term bullish view I don't really believe that expressing it via UNG is the best idea. I am not exactly sure how UNG works but I am familar with how USO works...and if they are similar...I wouldn't plan on making money as an investor in those ETFs. Because they are purchasing natural gas futures contracts they can be eaten alive by the commodity roll in which they have to get out of this months contracts and buy next months at a different price-and since they are passive long only investors with your money...I would argue they are not too terribly concerned.

If I was bullish natural gas in the long term (which truthfully I would just consider myself neutral at this point), I would probably look for a small basket of natural gas stocks and natural gas trusts. Dennis Gartman is a huge fan of natural gas trusts because they typically pay very competitive dividends and so long as natty gas remains above a certain minimum those dividends are covered. In addition to E&P natty gas companies and natural gas trusts, it might be worth considering a few engineering/services companies that are significantly weighted towards natural gas drilling/services.

Either way, short term outlook for nat gas is hardly positive in my mind...but i wouldn't short it either. I would leave UNG/USO alone and find other ways to profit from your views. Good luck.

Jun 12 09:12 AM

[NEGRINIENERGY:]

The gas industry largely benefitted from technological innovation in the upstream oil industry, specific new technologies spectacularly extended the possibilities of transporting this energy source, hamstrung by the fact that it is necessary to transport a volume
1 000 times larger than oil for the same energy content, making gas transportation at least five times more expensive. Natural gas liquefaction, long-distance pipelines and deep offshore pipe-laying tremendously improved gas supply.
Gas flows between countries and continents accordingly grew unchecked, accompanied by the installation of new, sophisticated and costly transport chains. In 2006, international flows were close to 886 bcm, covering about 30% of marketed production.
Downstream, combined-cycle gas-fired power plants have revolutionised the power sector, transforming it into the locomotive for world gas growth. Besides technical and economic performance, produced by efficiencies as high as 58%, combined-cycle power plants also offer compact facility design, a reduction in construction time and investment, plus better space integration.

Jun 12 11:15 AM

[Shale Gas:]

Thanks Daniel, I appreciate your input.

Jun 13 05:43 PM