Energy, Inflation and Gold

Being a firm believer in peak oil's impact on oil supply/demand fundamentals, it amazes me that oil stocks such as Conoco Philips (COP), Exxon Mobil (XOM), and Chevron (CVX) have not performed better in the last few months. I'd also throw the energy services stocks into this group. How stocks such as Schlumberger (SLB), Transocean (RIG), National Oil Well Varco (NOV), and Noble (NBL) have not performed better considering the current fundamentals and prices of oil and natural gas is beyond me. Let's take a closer look at Conoco Philips.

Conoco Philips currently trades around $75 and has a 52-week range of 66.24-90.84. This puts the PE=10.5 and the dividend yield of 2.5%. With oil over $100/barrel and natural gas over $9, COP has been printing money the last few quarters. Sure, crack spreads have contracted greatly because the price of gasoline has not kept up with the price of oil. However, as the refiners shut down for the maintenance and demand picks up during the summer driving season, gasoline prices will rise and Conoco Philips will be hitting on all cylinders. COP is the largest producer of natural gas in the US.

Despite the negativity, some analyst opined when Conoco bought Burlington Resources that COP's strategy in natural gas is dead-on and will be a huge money maker for them in the coming decades. Although Russia seems to be a very tricky place to do business these days, Jim Mulva appears to know what he is doing with respect to COP's 20% stake in Lukoil. This partnership is proving to be a nice growth vehicle and is delivering tidy profits.

What is with Exxon Mobil's skimpy 1.6% dividend yield? This is the lowest dividend yield of their peers: COP (2.5%), CVX (2.7%), and BP (5.4%). This is even harder to figure when one considers that XOM's cash flow, profits, and balance sheet are arguably the best of all the majors. When I contacted Exxon Mobil about the paltry dividend, a vice president gave the usual excuses about stock buy-backs, XOM's stock appreciation, etc. etc. All that said, the chat rooms are abuzz with long term shareholders who cannot sell their shares due to tax considerations and are quite angry that the company doesn't guide some of that huge cash flow into the dividend as opposed to stock buybacks. With oil over $100/barrel, oil stock shareholders should receive both price appreciation AND a decent dividend. XOM should be yielding close to 3% according to many, almost double the current dividend yield.

Back to peak oil. If you believe Matt Simmon, Boone Pickens, and investment gurus like Stephen Leeb that peak oil is a very real and dominant theme for the coming years, it is hard to invest in anything but energy, energy services, and gold. As the cost of oil continues to climb, inflation will also rise. The policies of the current administration don't help, as fiscal and foreign policies have had a disastrous affect that are exacerbating (and accelerating) the effects of peak oil on the markets.

Bottom line is this: oil will continue to be strong, the U.S. dollar will continue to weaken, inflation will become a dominant investor consideration, and an investor must have a decent position in gold as an insurance policy. You can buy the bullion directly, an ETF like streetTracks Gold ETF (GLD), or play the equity side with a position in Fidelity Select Gold [FSAGX]. Regardless, get over your hesitancy to get into the volatile gold market. Remember, the reason most investors don't own things they need to own is because they are uncomfortable with the investment. Don't let this happen to you.

Disclosure: Author holds positions in some of the above-mentioned securities.

Comments

[clear1]

Great article...so many don't want to believe that these assets are in a bull market! So obsessed with real estate as their inflation hedge....yikes! I read another great article summit-advisors.com entitled "Do commodities belong in your portfolio". Worth a read...

[famos]

Hi,

I could not agree more with author. I agree with everything he said, but have one thing to add, i.e. why in the hell is our government and the market not pushing "coal/garbage to diesel" (CTD) and getting away from giving the Arabs all our money?

Famos

[Amidwesternneighbor]

Famos...we give Arabs all our money because we are in the era of political correctness and "diversity" in the U.S. - we dare not utter that Islam is an errant "religion" which has always had jihad at its core, from the days of Mohammed himself almost continuously through the present! Also, there are those Americans who *want* to take the country down a peg or two, feeling that the U.S. is "too big for its britches" in the world...a clear juxtaposition from those of us, who like our founders, see it as a place of freedom...which means freedom to excel!! Further complicating matters...those same liberal factions hide behind environmentalist whacko front groups and claim that it is due to ecological concerns that we should not drill in ANWAR...yet all the while, Al Gore, among their leaders, owns no fewer than 4 houses!! Any single one of which costs double for HVAC and electricity than what I pay in my more average domicile!

The bottom line: vote where common sense is, not with those who would bind our country's future with regulatory burden and strip it of the means to excel! Oil is the fuel of our economic engine...now and for the foreseeable future!

[paultaut]

stay with what works....the stock market is moving because the weakest commodity traders are fleing commodities....why? Contract margins have been raised. Just commodity margins, not stock market margins.

The big boys will pick up the slack when they feel the small fry are gone....they will be far harder for the Gov. to shake out......Paulson isn't stupid.

Meanwhile, what goes up if the economy stabilizes? Basic materials, industrials, etc....the perrenial energy users....so if the stock market has hit bottom and the economy will reaccelarate.....Energ... and commodities in general will rise with it.

Who actually beieves the Gulf will miss a huricane for the third straight year?

[mkreisel]

The US is very smart in protecting its own natural resources under the disguise of "Environment Protection". The longer the oil in ANWR and Rockies remains untapped, the more valuable it becomes. Once OPEC's fields have all peaked, guess who will have the last laugh?

[SD CDL]

Agree with the author and a few of the posters...
paultaut - great in pointing out what few mention about the commodities and the margain requirement...quick to attempt to attack gold when it makes a bull run but hands off on all other asset classes since in Greenspan's words, its too hard to identify on the way up.

midwest neighbor - we give our money to the Arabs because we want to drive our SUVs and trucks and want to plan society around cheap oil. That's like blaming a drug dealer for helping our addiction. Not sure what you mean about taking America down a peg or two but we've been overspending waaaaay to much and producing waaaay too little so in that sense, yes, we need to pull back...both individually and the Gub'ment. What is so unpatriotic about living with your means?

mkreisel - is ANWR enough? How many BPDs vs how much we consume...I think it won't even match yesterday's demand let alone tomorrow's. Numbers please

[WindwoodTrader]

This is a response to a question by"Famos" as to why our government isn't doing more to push non-oil energy.
I suggest you check out a book by Kevin Phillips called

"American Theocracy- The Peril and Politics of Radical Religion, Oil and Borrowed Money in the 21st Century"

This book came out a couple of years ago. Phillips is a former Republican strategist who has written a dozen books on wealth, democracy, fanatical religion and, of course oil and the current administration.

It's a must read- It's almost as though he had a crystal ball and was predicting what is now happening.

Scary as hell!

Windwood Trader

[Darrell]

Mkreisel evaluation of the US strategy on currency is correct: the world’s central bankers accept the dollar as legal tender for commercial transactions within their country. This means that Americans can go any where in the world and exchange the dollar for goods, services and/or assets.

Our politicians have developed into moralist and passed laws that prevent oil exploration on offshore California, in the Rockies, and other areas of the country where damage to the environment could occur if exploration activities took place,

Meanwhile the world central banker’s are stockpiling dollars at a rate not seen since the beginning of currency exchange system. What are they going to do with this currency hoard?

One thing is for sure our government will not allow the central bankers to use their dollar stockpiles in a way that would damage the US economy. So yes, buy commodities, but be sure that mines are in friendly countries.

[ClarkF]

Enter your comment here Re: Midwestern Neighbor--I hope you know your investments better than your rant indicates. You need to stop listening to talk-show screeds and learn about the Muslim religion for yourself. Jihad is a religious concept, a war against personal unrighteousness, misused by fundamentalists. Very much like Christians who overlook Jesus' plain teachings on "love your enemies."

By the way, I'm not only a "liberal," but long oil, gold, ag.

[LuvOandG]

Just for clarification, the author should do a little better research. Noble (nbl) is an independent O&G company, not an oil services company. Noble Drilling is in the drilling/services area and is a completely seperate company.