Hope everyone has a healthy, happy and prosperous New Year.
Back from a small getaway and am catching up on my reading. I guess I need more NG starting tomorrow.
Also from Barrons!
Interview with Jerry Jordan of Boston-based Hellman Jordan Management
Also we are interested in cyclical industries where capacity utilization has remained high during the recession, like the refining business.
A: Capacity utilization throughout U.S. industrial companies is
running around 78% or so. U.S. refineries are running at 91%. A
decade ago, in the last recession, they were running at 74%. We
have not built a new refinery in the U.S. in the past 15 years, but
people still drive cars, and in the next economic upturn, when
people are back to work again, they'll consume more gasoline
and more heating oil than in the last cycle. New rules expected
from the Environmental Protection Agency will likely restrict
production even further. We are going to have a big refining
shortage.
My favorite idea is Valero Energy, the second-largest U.S.
refiner. This is a little old refining company down in Texas that
in the last three years has about tripled its size. They've acquired
other refineries and they have become probably the major
independent refinery in the country. It is expected to earn no less
than $5 a share in 2002, yet the stock trades at a multiple of
seven times trailing earnings. This is remarkable, to have a
cyclical company selling at seven times earnings at the bottom of
the cycle. Under normal operating conditions, sometime in
2003-4, I think Valero will earn more than $5 a share in a
quarter and perhaps $15 a share in a four-quarter period.
Q: So you are buying cyclicals now based on expectations for
2003?
A: That's when we are going to see the big numbers. This gets
to the issue of valuation. If I told you that Patterson-UTI
Energy, one of my favorites in the natural-gas area, sells at 20
and was going to earn $4 in 2003 with short rates less than 2%
and long rates at 5%, you might get out your calculator and
realize this appears to be inexpensive. Maybe it should sell at
14-15 times $4, which is what I expect.
Q: You're still a fan of natural-gas stocks?
A: In addition to Patterson, we own Nabors Industries and BJ
Services and National Oilwell. All are major players in the
onshore drilling industry. Natural gas is in huge supply around
the world, there is plenty of it. The problem is we've consumed
all of the easy reserves in North America. This last cycle we
burned up a lot. Gas went to $10 an mcf. We are going to have
another problem with gas, because we are going to have to drill
deeper to get it. We'll eventually be able to import it, but not for
five or six years or so or until gas stays at a high enough price to
make it affordable for people who import. In the next upturn,
these four companies will be winners. All of these companies'
profits have peaked and they are going to go down now because
as prices have come down, drilling has come down for the
obvious reason. So we are waiting for the next uptick in prices to
start the next cycle. |
