The disparity between six-year oil at $86 a barrel in the commodity market and large cap oil producers at a median $58 a barrel in the stock market points to opportunity, we believe, in recommended high quality producers like ExxonMobil (XOM), Canadian Oil Sands Trust (OTCQX:COSWF), Total (TOT), Chevron (CVX), PetroChina (PTR) and ConocoPhillips (COP).
Trading above the 40-week average of $83, oil for the next six years acts like it has to be part of global economic growth and that new supplies do not come cheaply. Oil does look cheap in oil stocks, which live in the shadow of governments who would like to load them down with more taxes. Ironically, higher taxes only drive up oil prices more, as we see it. Nonetheless, there can always be negative surprises in commodity prices or government actions.
We think the gap between 86 and 58 is more than wide enough to cushion moderate risk in committing to high quality producers. We measure the price of oil in the stock market by multiplying the median McDep Ratio of 0.77 by $75 a barrel, which is our long-term price assumption used in calculating the denominator of the McDep Ratio. There is a rich suite of attractive stocks at low McDep Ratios in our continuous analysis.
Originally published on February 23, 2010.