David - All / Oil
Sure does look dismal. To make things worse, natural gas inventories are also accumulating and we are in an access inventory position.
Listened to an oil analyst this morning on CNBC and he repeated what I had said Saturday regarding world supply and demand. He was really concerned with declining usage rates of Asian countries. He didn't offer any opinion on longer term oil pricing but did say the sector has been plummeted and there were attractive buys. He specifically mentioned Burlington Resources who is dominant in gas production.
He said the outlook for drilling companies was bad and it would take a long period of time before they begin to recover. I took it that he felt the producers were the better buy at this time and then move into drilling/service stocks with signs of better times in the oil industry.
Regarding ultimate pessimism, I hope we already have been there. As bad as it is at this time, the large financial firms in US are beginning to recommend investment in the oil sector.
I am not so sure that the timing is right. We are confronted with another factor -- declining markets in general. In review of the market scenario for oil and gas, we've just about seen it all to this point in time. Remember, the correction in the oil's occurred in when the stock markets were robust and healthy. How much more downside is there in oil's if the market environment turns sour. The DJI stocks are due for a further correction. If that happens, investors may be bailing out of everything. Keep in mind, small and mid sized stocks have not participated in gains this year.
To be quite honest, I don't know what has held up the Toronto 300 thus far this year given the fact that all resource sectors are in a turmoil. Most other issues are mid-cap category or lower and in comparison, they have not performed well in the US.
Banks and financial services have done well, as in the US, but black clouds are now overhanging the industry based upon analyst comments on CNBC.
Then there is the fall in the Canadian dollar. Sure doesn't add to a positive situation. The only advantage here is to the resource sector and the serious problems existing there, far outweigh the declining CDN$.
The Asian economic crisis is a curse on world economy -- much more than realized early on. Worse, there is no quick cure to the problem. Starring us in the face is devaluation of currency in China. If that happens, and it probably will, the markets will take a bigtime hit.
Depressing -- sure is. Bottom line to my thinking is this -- if one wants to remain in the markets, oil and gas is where the dollars should be invested at this time. Why - downside is a lot less than other sectors. I'm looking at producers over that of service firms. Further, I'm only going to look at decent sized junior's or larger. - those expected to substantially add to production and reserves over the next 18 months based upon existing operating plans and identified drilling targets. In other words, speculation is out, basic's are in.
Watch cash flow to debt ratios. This is the primary area to monitor. Those companies falling behind in forecasts will be in danger of coming under extreme pressure from financial loaners.
Avoid the cases where cash flow to debt ratios were 1.5X beginning the year and will now be 3.0 at year end, without increasing the principal debt amount in terms of dollars. Companies must grow working within their cash flow.
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