This guy Jubak, seems to give both sides of the argument you and Stan are having. He seems to be having as much trouble deciding what to do as the rest of us (other than you and Stan (ggggggggggggggg).
Been hearing a lot lately that most gas wells drilled this year are mainly shallow, low pressure wells in existing fields that lose pressure quickly,...quick to drill and take advantage of, but quick to run out of gas. Also that active drill rig counts are going down week by week. Also even though they drilled lots of successful wells, this years drilling for gas didn't replace what they used up last year. Also heard companies that are capping wells are having a record quarter, and that most companies will cap a lot of wells if the price goes below US$1.50 per mmbtu because "it just ain't worth it",...those are the companies that have cheap drilling and production costs.
Seems like most of the demand and supply has been hedged at much higher prices for the next six months. That suggests that customers may not be buying because they contracted for this years supply earlier at much higher prices. Once the contracts are fulfilled, a lot of wells that produce at higher costs will likely be capped, and the spot and futures price could shoot upwards as quickly as it dropped,...maybe quicker with a cold snap. Tough to figure out when to buy,...look at NCF.un and ERF.un today,...blinked and they were up a dollar.
Think I'll just continue to slowly average in,...just heard snow flurries may come to the Northeast this week :-))
http://moneycentral.msn.com/articles/invest/jubak/7703.asp
Jubak's Journal
5 energetic stocks to look at for the long term
I'm keeping an eye on the most promising energy picks, but I'm not quite ready to buy just yet. My reasons help demonstrate why long-term investors are buying now and short-term traders are selling.
By Jim Jubak
Who’s buying now?
Somebody is. Every seller requires a buyer, right? So who’s on the other end of those “sell” orders for Sun Microsystems (SUNW, news, msgs), Merrill Lynch (MER, news, msgs) and Exxon Mobil (XOM, news, msgs)?
I’ll give you one answer, a generalization that I think explains a good part of the dynamic of the current stock market.
Sellers are more likely to be investors who are focused on the short term. They’re worried, and justifiably so, about the possibility that the economy is in a recession that could last into 2002, about more earnings warnings for the September quarter, about lowered projections for earnings for the December quarter and about the still-undefined nature of what President Bush has labeled the first war of the 21st century.
Buyers are more likely to be investors with long time horizons. They admit that all these short-term problems worry them, too, and they admit that they don’t feel able to call the bottom. But they draw on history to support their belief that stocks such as General Electric (GE, news, msgs), Citigroup (C, news, msgs) and Applied Materials (AMAT, news, msgs) will outperform the market over the long run. Current depressed prices look attractive on a historical basis -- as these investors read history -- and they’re willing to wait for the recovery.
This group of buyers isn’t made up just of individual investors with a high threshold for pain. In that camp you’ll also find seasoned value investors such as David Dreman of Scudder-Dreman, and Martin Whitman of the Third Avenue mutual fund families. And companies such as EMC Corp. (EMC, news, msgs) and Duke Energy (DUK, news, msgs), which are making acquisitions that range from tiny (EMC’s $50 million acquisition of Luminate Software) to sizeable (Duke’s $8.5 billion deal for Westcoast Energy (WE, news, msgs) of Canada).
Bears rule the Street
It’s clear that there are a lot more sellers than buyers at the moment -- that’s why stock prices are going down, after all. And the sellers do have some solid numbers on their side. Just Wednesday, Lehman Brothers cut its estimates for 2001 earnings for the stocks in the Standard & Poor’s 500 ($INX) by 17%, and by 12% for 2002.
Sentiment has also clearly swung toward the bears. The latest Investors Sentiment survey puts 37.6% of newsletter writers in the bearish camp and 35.7% in the bullish party. The American Association of Individual Investors survey of its membership comes out even more bearish at 44.6% to 31.1%.
But just because sellers outnumber buyers doesn’t mean they’re right. In fact, long-term investors argue that the swing in sentiment toward the bears is actually a contrary indicator. The market will go up, they argue, when sentiment begins to swing back and some of the money now on the sidelines gets back into the game. Using bearish sentiment as a contrary indicator has a very good record, notes Michael Murphy, editor of the California Technology Stock Letter. By his count, the last 19 buy signals from this indicator have all resulted in a profit.
So how do you decide? As long as the effort stays abstract, I think investors remain locked in a fruitless argument about which is correct -- the short-term sell or the long-term buy. But if you actually look at a specific sector in detail, I think you’ll see that the two seemingly contradictory opinions and recommendations are but two faces of a single investment problem. In my view, both the short-term sell and the long-term buy are right and justified. The challenge is finding a way to minimize the risk that the short-term sell decision so clearly identifies, and to maximize the return that is behind the long-term buy recommendation.
Here’s how I’d do that for the energy sector, a part of the market where prices are currently determined by fear of the short-term downtrend and where the long-term opportunity seems especially rich.
The prices of energy stocks have been hammered in recent weeks, first on fears that a recession would lead to plunging energy demand and plummeting prices, and then on fears that the deeper recession likely to follow in the wake of the Sept. 11 terrorist attacks on New York and Washington would make an already bad situation worse. In the last month, Exxon Mobil and Chevron (CHV, news, msgs) among the super major integrated oil stocks have fallen 10% and 14% respectively. Natural gas producers Apache (APA, news, msgs) and Anadarko Petroleum (APC, news, msgs) are down 20% and 17% respectively, and wholesale power generators Duke Energy and AES Corp. (AES, news, msgs) are lower by 11% and 32%.
You don’t have to look hard to figure out why. World demand for oil will fall by about 10% in the fourth quarter of 2001 from year-earlier levels, according to the Centre for Global Energy Studies in London. Normally, U.S. demand for oil spikes higher in the fourth quarter as homeowners stock up on heating oil, but this year, analysts predict, the drop in demand for aviation fuel will more than make up the difference.
That’s sent the price of oil -- which stood near $30 a barrel for the benchmark West Texas Intermediate crude immediately after the attacks -- plunging. On Sept. 27, West Texas Crude closed at $22.74 a barrel on the New York Mercantile Exchange.
The price trends for other forms of energy aren’t much different. Electrical output declined 5.4% from year-earlier levels in the third week of September after falling 4.6% the previous week, according to Friedman, Billings, Ramsey. Natural gas inventories continue to build with an additional 91 billion cubic feet of gas injected into storage for the week that ended on Sept. 21, according to the American Gas Association. If current trends continue, calculates Friedman, Billings, Ramsey, inventory levels could reach 3.2 trillion cubic feet by November in comparison to a peak of 2.7 trillion cubic feet at the same time in 2000.
All this leads many energy analysts to conclude that energy prices haven’t yet hit bottom. Oil, for example, could easily fall to $20 a barrel or even $18, according to the consensus. That would be good for the economy -- lower energy prices spur demand and cut costs -- but it wouldn’t help energy stocks one bit. So stay out of the way until prices have bottomed.
Why buy?
So why buy energy stocks at all? Long-term investors know that energy stocks tend to bottom at something like current levels. For example, Merrill Lynch in a Sept. 27 research report noted that energy and production stocks tend to base at 20% to 25% discounts to net asset values “and that’s close to where stocks are trading now.” In other words, valuing proven energy reserves at $5 per billion barrels for oil and $1.25 per million cubic feet of natural gas on average, Merrill Lynch calculates that energy stocks such as Apache, Anadarko, Devon Energy (DVN, news, msgs) and EOG Resources (EOG, news, msgs) are selling at discounts of 20% or more to the value of their proven energy reserves.
Why buy now? If economic growth rebounds in 2002, as most economists now predict, energy stocks will climb in anticipation. Using the six-month rule, which says that stock prices anticipate economic trends by about six months, gives investors a rough timetable for buying into the sector. If you think the economy will rebound in the first quarter of 2002, you should be buying energy stocks now. If you think the rebound will wait until the second half of 2002, say June, then you should buy in January.
The consensus among energy analysts favors the earlier part of that schedule, not out of any innate optimism about the economy but because of the continued trend toward consolidation that they see in the energy industry. With exploration and drilling costs continuing to climb, especially when you take into account the declining “richness” of new finds, companies find acquiring proven reserves increasingly attractive. That means deals like Devon Energy’s recent acquisition of Mitchell Energy & Development (MND, news, msgs) for $3.1 billion. Acquisitions like that, energy bulls rightly say, will mean that prices for promising acquisition candidates like Alberta Energy (AOG, news, msgs) will respond to rising deal-flow and not falling energy prices.
I don’t see anything in essential conflict in the short-term sell and the long-term buy positions. To me, the difference in recommendations comes down to a question of timing and risk. The short-term sellers say that the risk of owning, let alone buying new positions, is just too great right now -- whatever the long-term potential reward. The long-term buyers say that the risk of not buying now outweighs the short-term downside.
Stated like that, the decision to sell or buy energy stocks comes down to this: Should you sell because there’s a substantial risk of energy stocks falling further in the short run? Or should you buy because there’s a substantial risk that energy stocks will climb in the short run? Let’s see what we can tell about the odds.
Risk vs. reward
I think the downside potential in the short term certainly qualifies as substantial. OPEC, the Organization of Petroleum Exporting Countries, finds itself unable to cut production right now to support prices. A supply-cut/price-hike when the world is teetering on the edge of recession simply isn’t a politically viable move for the oil-rich nations in the group that depend on the United States and its allies for their military defense. And the current search for global unity in the war against terrorism takes a supply cut completely off the table at this point. OPEC, which would have liked to cut supplies to defend the price of oil in the mid-$20s, may simply have to swallow $18-$20 a barrel oil in the short run.
The economic numbers are also likely to be down in the short run, as the much-anticipated recession actually materializes and then gets factored into economists’ projections for growth and analysts’ estimates for earnings per share. Second quarter GDP growth in the United States was barely positive at 0.2%, pending this morning’s final revision to the figure. And everybody now expects growth to fall into negative territory in the third and probably the fourth quarters of 2001. But expecting a negative number is still much different than actually seeing it. I’d expect that the initial GDP figure, due for release on Oct. 31 at 8:30 a.m., will prompt another round of downward revisions in projected economic growth and earnings.
The case for energy stocks climbing unexpectedly in the short run is much weaker. It rests on the possibility that the initial U.S. military response to the terrorist attacks will disrupt the flow of oil from the Middle East in such volume that it causes a spike in prices. Given the probability that Afghanistan, not a major oil exporter, will be the early target, that scenario seems unlikely at least in the short run. OPEC could cut supply against all expectations, the winter could turn remarkably colder earlier than expected, the U.S. economy could fail to dip into recession as expected -- all those would push the prices of energy stocks upward.
So here’s where I come out. In the long term, I’d like to add more energy stocks to Jubak’s Picks because the long-term story makes sense to me, because valuations are attractive in historical terms and because I believe that economic growth will pick up in 2002. I’m not going to sell Chevron or Apache out of Jubak’s Picks for that reason.
But I’m not going to buy right now because I think the short term is slanted too heavily toward risk. Given the news flow over the next month as companies announce earnings that show exactly how weak the economy is leading up to the Oct. 31 GDP number, I think it makes sense to wait. (At this point, it also makes sense to wait and see how the initial phase of the Afghanistan conflict unfolds.) That could change if investor psychology does, but at the moment that kind of rough guess is about the best that I can do.
In the meantime, I’ll be researching some stocks from my potential energy buy list. My top five include Alberta Energy, Anadarko Petroleum, EOG Resources, Forest Oil (FST, news, msgs) and Talisman Energy (TLM, news, msgs).
New developments on past columns
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3 keys to making a bundle on energy’s new era
Apache (APA, news, msgs) has taken a beating lately -- down 20% in the 30-day-period that began on Aug. 27 -- along with the rest of the energy group on fears that slowing global economic growth will mean lower demand for oil and gas. I think Apache is headed for a bottom sometime in the next month or two as data confirms the United States has slipped into recession. I’d use that as a buying opportunity in Apache. The company’s 37% interest in the new Ladyfern gas field, which is shaping up to be one of the biggest gas finds in Canada, and the 67% stake in Egyptian offshore fields adjacent to a large British Petroleum (BP, news, msgs) strike, will give Apache a big new supply in 2002, just when prices look likely to turn. I'm keeping Apache in Jubak’s Picks, but as of Sept. 28 I’m lowering my target to $62 a share by September 2002 from the recent target of $76 by December 2001. (Full disclosure: I own shares of Apache.) |
