Oil Boom Runs Out of Gas
Oil prices have been bouncing all over the place. After cresting at $77 a barrel last summer, they plunged to $51 in January, rebounded to $62 and settled March 14 near $57. The most recent drop has been on fears of economic slowing.
What's next? The answer has a lot to do not only with whether you can make money in the energy sector, but how long the global economic expansion and bull market will continue.
Let's be honest. No one can predict what madness might erupt next in the Arab world. Another war, or a spillover of the Iraq war into a global conflict, could send oil prices soaring. But there's simply no way to tell when -- or if -- something like that will happen.
So we're left with weighing the fundamentals of supply and demand and the current geopolitical situation. From those perspectives, Charles Ober, manager of T. Rowe Price New Era fund, expects oil prices to average between $55 to $65 for the next two or three years.
His reasoning: A surprising amount of new, non-OPEC oil should come to market in the next couple of years. Indeed, the new supply will outstrip demand. That happy situation will last just two years or so. After that, Ober expects the price of oil to resume its upward climb at a pace at least as fast as the growth in the world economy.
He's turned cautious on oil and gas stocks, too: "I don't see energy stocks as one of the leading market sectors. I would guess it would be in the middle of the pack -- in line with the market, maybe slightly worse than the market." One headwind investors in energy stocks are facing: Earnings will almost certainly compare unfavorably with last year's figures. Wall Street doesn't like that.
Ober, who has been managing the fund for ten years and was an oil analyst for many years before that, is my favorite energy maven. Now, he's neutral on his sector. I think you should be, too. This is certainly no time to own funds that track oil directly. The same goes for diversified commodity funds, which tend to be heavily tilted toward oil. You can't make money by owning a commodity unless its price goes up. Pimco Commodity Real Return Strategy D (PCRDX), for instance, lost 3.5% in 2006.
But you can make money in a trendless energy market by investing in the shares of well-run companies. New Era (symbol PRNEX) doesn't offer quite the portfolio diversification of a non-stock commodity fund, but it's still a terrific diversifier.
Putting 5% of your stock money in this fund may still make good sense. It has returned an annualized 19% over the past five years and 13% over the past ten years. Expenses are just 0.68% annually.
You need to take a good look at your other stock funds first, though. Energy was the second-best-performing sector in the stock market last year, and that hardly escaped the notice of other stock fund managers. You may find you already have 10% or more in energy stocks in some of your other funds. Ten percent is the sector's current weighting in Standard & Poor's 500-stock index.
Still, cautious investors, in particular, can make a case for putting 15% of their stock money in energy stocks just now -- precisely to insure against an outbreak of more trouble in the Middle East.
Certainly, you wouldn't want more than 15%. The long-term history of commodities is clear: Eventually supply catches up with demand, one way or another.
Pick your stocks with care
Ober is neutral, not bearish. "But you have to be careful where you make your bets," he says. "You have to look at companies that really have financial discipline or are really cheap. You don't want to own the whole industry."
He's leery of energy-service companies that are primarily dependent on onshore oil or shallow-water oil. That's not where the big finds of the future are going to be. "You want international energy service companies and firms that help drill for and develop oil in deep water."
His favorite is Schlumberger (SLB). The world's biggest energy-services concern is also the best of its breed. The company has "an extraordinary capability to bring in and apply new technology." The global company has established great relationships, nurtured over many years, in such places as Russia, Nigeria and the Middle East.
About one-third of New Era is currently in foreign stocks. Ober says he's simply finding a lot of good companies abroad. Total (TOT), a major integrated oil and gas company, is a French-based favorite. Total has "an extraordinarily good portfolio for growth all the way out to 2015."
Another Ober pick is Statoil ASA (STO), the Norwegian oil company, which is 60% government owned. "The company is at the cutting edge of using new technology for finding and developing oil."
New Era isn't restricted to energy stocks. Ober currently has about 65% in oil and gas -- at the high end. A favorite among his other holdings is Potash Corporation of Saskatchewan (POT), the Canadian-based fertilizer company, which will benefit from higher prices for corn and soybeans.
Ober regards the new push for corn-based ethanol as "a sad situation. Not only does it take as much energy to produce ethanol as you derive from it, but you're subsidizing it" with tax dollars. But he sees Potash as a beneficiary of ethanol's political popularity.
As far as alternative energy, Ober sees real profit in wind. He won't identify companies, though, because "I haven't finished buying." Stay tuned.
Steven T. Goldberg is an investment adviser and freelance writer.