Seeking Alpha
Profile| Send Message|
( followers)  

“For every action there is a reaction. I think there will be one or two spectacular attacks and then it will all return to normal.”

-- Ayman Khalil, director of the Arab Institute for Security Studies, Amman Jordan

“The potential of violence from retaliation brings more upside than downside (for oil prices) . . .."

--Serene Lim, commodities analyst, ANZ Bank in Singapore.

Osama Bin Laden’s death has been widely reported as bringing risk reduction to the oil markets. Unfortunately, the opposite is true. The killing of Bin Laden at the hands of US Special Forces couldn’t have happened at a worse time for the West, as oil prices continue to rise into the driving season and the Arab Spring wrestles with messy, disorderly transitions in Yemen, Egypt, and perhaps even Syria.

The Bin Laden death creates geopolitical risk in two distinct ways. The first and most obvious: Al Qaeda will feel incredible pressure to hit back. The second and less clear: a resurgence of Islamist rhetoric may cloud over the Arab Spring’s more secular discourse.

It is yet another reason why Canadian oil will become more and more valuable to US energy security concerns. Monday’s election of Harper and a majority conservative government in Canada suggests even wider support for the industry in the coming years. ETFs like ENY and companies like Enerplus (NYSE:ERF), Provident (PVX), and Penn West (NYSE:PWE) should be in every retirement portfolio.

As Al Qaeda has become extremely decentralized, minor reprisal attacks are technically possible in Europe, Asia, or Africa. But a direct attack within Saudi Arabia would be the most effective “symbolic” vehicle, as it would try to lay blame for Bin Ladin’s death back on Saudi complicity with the West. Fred Burton of Strategic Forecasting (Stratfor.com) issued the following statement to oil company clients in the Middle East: “ be very concerned about anti-American blowback and maintain a high degree of situational awareness.”

The death creates new geopolitical risk in another, more atmospheric way: it may color the recent Arab revolts with what had been a receding Islamist discourse. The Jasmine Revolution was so fresh and shocking for its non-religious tone. Its youthful, economic, anti-corruption platforms were what solidified the movement.

Particularly in Egypt, the death may bring back a sympathy or wistfulness for that Islamist, “golden age” rhetoric that drove Arab resistance from the 70s through 90s. The Bin Laden death may alter how the older, “businessman wing” of the Brotherhood, which presently controls much of the national agenda, has to deal with the true radicals in their party.

So, if Bin Laden’s death amps the near term risk level of Middle Eastern oil, where to invest?

I believe, in this context, Canadian oil becomes even more attractive, offering astonishing visibility in contrast to the Middle East’s grand uncertainty. The election of Harper and a majority conservative government further solidifies a benign regulatory environment for the energy industry.

Penn West Petroleum is one company that has been beaten down severely as of late, and may be worth looking at. A former trust, the company offers a 4.38% dividend. It got as high as $28.98 on February 28, and is now trading at $24.28.

Focused on light oil, Penn West is the largest producer of light and medium oil in western Canada. According to one source, 70% percent of reserves and 68% of reserve additions in 2010 were liquids. With “net proved plus probable” reserves of 565 million barrels of oil, Penn West enjoys a sizable largesse and over 8,200 drilling locations.

A recent article decried the company’s negative 5 year annual growth rate. But a closer look at more recent metrics - the three year and one year - suggest EPS growth rates of 27.3% and 246.3%, respectively.

Analysts are expecting revenues of $852 million, a full 27% increase over last year. Consensus earnings are at 14 cents a share - amid a spectrum from .41 to -.01 a share. After the major run-up in oil prices, this company could easily outperform on earnings this quarter (due out May 5) and alter negative perceptions, which have been colored by its recent dividend reduction and heavy debt.

On Thursday, Penn West will likely reveal itself to be the buyer of Spartan Exploration, which disclosed that it had been purchased by a “senior” oil and gas player back in late March. Indeed, Penn West shares property lines with Spartan in the Cardium area, which may make it a good fit. And though it may have been a high price, at 229 million, the deal offers great long term benefits.

Penn West is planning to drill 100 - 110 new wells in the Cardium area alone, operating 7 rigs. The company is highly levered to western Canada, and is focusing on horizontal, multistage development. Strong drilling results in 2010 led to raising the company’s capital expenditure budget for 2011 to over $1.1 billion. This is now priced into the stock. As the light oil of the Middle East experiences a risk premium, this company will become more and more interesting.

Faced with the oil supply forecast numbers, the company’s own earnings call Thursday, Tuesday saw a panic of selling. Investors should recognize that the stock is very near-term oversold.

An aggressive three-week-old shorting campaign is now very “long in the tooth” and is likely to be closed out in the coming two days, creating a powerful bounce. Expect a pronounced rise if the EPS number comes in north of 14 cents.

Disclosure: I am long PWE, ERF, PVX.

Source: Penn West Worth Looking at in the Wake of Middle East Uncertainty