If the old investment adages -- "buy when there is blood in the street" and "buy at the point of maximum pessimism" -- are still valid, those investing in quality OS stcks today should fare quite nicely thank you. I doubt we will again see the kind of fast 50% pop we saw in October, but patient investors will reap enormous gains.
Alan Abelson's unnamed energy pro buddy likes natural gas stocks here.
December 7, 1998
Up & Down Wall Street, Part 2
Return to Up & Down Wall Street, Part 1
We're mindful that among the explanations for what impelled Exxon and Mobil to tie the knot,
we failed to mention the one so heartrendingly and incessantly cited in the press and on the tube --
the pathetic state of the oil market. Never mind that with prices at 12-year lows, supply gushing
out of every global pore and demand dragging, notably in Asia, Exxon and Mobil still manage to
wind up earning billions. Hard times, we're assured, made them merge.
In one respect, those maudlin natterers have it right. Exxon's a shrewd operator and knows that the
time to buy is when prices are low and sentiment is limp as a dishrag. Were oil going for over $20
a barrel instead of $11-and-change, the seemingly generous premium it's paying for Mobil would
stack up as peanuts.
A couple of weeks back, we ventured that, from an investment viewpoint, energy was so far
down, it looked like up. In the brief interval since, nothing has changed -- except energy has sunk
even further. But we're with Exxon on this one and, if anything, we're more convinced than ever
that oil and gas stocks are now more appropriately viewed with greed than fear.
Our conviction is only strengthened as the bad news from the Oil Patch piles up. A clear sign of the
pain in the Patch is that idle rigs are proliferating in the Gulf of Mexico, and the cost of hiring one
for a day is down to $20,000 from $45,000 a year ago and a peak of $70,000 earlier this year. For
natural gas alone, fewer than 500 rigs are gainfully employed, compared with close to 650 this
time last year. Is it any wonder that "wellheads" are now called "sickheads"?
OPEC has just finished a meeting held solely for the purpose of publicly affirming its disarray. As
crude dropped like a stone, forecasts of gloom and doom flooded the public prints. Charlie
Maxwell, a veteran oil watcher, and formerly of C.J. Lawrence, when there was a C.J. Lawrence,
filled what seemed like columns of The Wall Street Journal with melancholy predictions of glut and
single-digit prices as far as the eye could see.
All marvelous grist for the contrarian's mill. But it isn't only our contrarian impulses, much as we
treasure them, that fires our enthusiasm for energy. As we tried to convey a fortnight ago, the
woes visited on the energy business contain the seeds of their own cure.
Capital spending is being scaled back drastically, replacement of declining reserves is falling, and
in kindred and sundry other ways the urgency to add to supply is on the wane. More tangibly,
what self-interest couldn't make OPEC and other producers do -- namely, cut back on output -- a
humble necessity may. For where to store all that viscous stuff being so energetically pumped up is
becoming a bit of a problem.
At any given time these days, tons of tankers, a seasoned oil hand tells us, are bobbing about
aimlessly on the blue waters, all loaded up with crude and nowhere to go. In short, production
may be reduced by the Saudis et al. for the simple but compelling reason that there's no place to
put what's being produced.
If optimism on energy is hard to come by these days, it's not entirely absent. And we're most
impressed by the quality of the bulls. Typical is a fellow we've been buddies with for a long, long
time, who deals in oil and gas properties, invests in oil and gas stocks (short as well as long) and,
as he'll be the first to tell you, knows everything there is to know about oil and gas. We'll call our
buddy Bernie, because that's what his name is.
Bernie may be the only man in Midland with a smile on his face. And that's because earlier in the
year, he shorted a bunch of oil and gas stocks, which, with neat timing, he covered not so long
ago. When 1998 was young and the buzz in the energy biz was strictly happy talk, we gave such
talk currency in this space (forgive us, we knew not what we did). Bernie called in his inimitable
kind and gentle manner to tell us we -- and our sources -- were full of it. And so, it turns out, we --
and they -- were.
But when we chatted with Bernie last week, we found him, as noted, bullish (or as bullish as he
ever gets) and for most of the reasons we've offered for our own departure from skepticism. He's
especially keen on companies that are heavily weighted to natural gas.
His partiality for natural gas partly flows from the fact that reserves are conveniently on this
continent, where he can keep an eye on them, in contrast to oil, where reserves can be and are
scattered in the most inaccessible places in the wide world. More immediately, he thinks the price
of gas is primed to pop.
The astounding warm weather that has enveloped so much of the country has been murder, of
course, on demand for both oil and gas. But Bernie, something of an amateur meteorologist, says
an exotic friend of his called La Nina is destined soon to banish the balmy currents and bring chilly
days and frigid nights to this fair land's midsection and Northeast.
The "huge gas oversupply," he snorts sarcastically, "is equal to a whole week's production," so it
won't take too much arctic air to send natural-gas demand -- and prices -- hurtling upward. From
around $1.95 per thousand Btu at the moment, he sees gas spurting to as high as $3.
What makes that prospect all the more mouth-watering to Bernie is that so many natural-gas stocks
are in the tank and trading at huge discounts from their breakup values. And since he uses the
accepted rule of thumb that in buying natural gas (or oil) reserves on the private market, you pay a
third of the going product price (which is currently $1.95 for gas, $11-$12 for oil), his breakup
numbers are themselves conservative.
The stocks he likes are Burlington Resources, selling around $33 a share, whose breakup value he
puts at $56-$60 a share; Tom Brown, selling for $9 and change, with a breakup value, he figures,
above $20; Louis Dreyfus, changing hands around $12, by Bernie's reckoning would be worth
$18-$20 if acquired or liquidated.
In the same vein, Cabot Oil & Gas is going for $14, or about 50% below its breakup value. Pogo,
whose shares trade at $12, if broken up would fetch $22-$25, according to Bernie's estimate.
Apache stock sells for $21, versus a breakup value of $32. And last but not least, Snyder trades
around $12 but would be worth $20 if put on the block.
That's Bernie's song, and what makes it worth listening to is that he puts his money where his
spiel is.
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