An Interview With Fahnestock Senior Oil Analyst Fadel Gheit
• • • StockHouse interviewed Fadel Gheit in the midst of the first significant oil rally. Mr. Gheit is the Senior Oil Analyst at Fahnestock in New York City. He was named the top oil stock picker by the Wall Street Journal and was at the top of their All-Star Analyst's list for the past two years. Mr. Gheit is frequently quoted in the media and is a frequent CNBC-TV guest. StockHouse again interviewed Mr. Gheit after crude oil prices continued their skyward momentum and closed higher, in Monday's trading, after the Tech Stock meltdown. He warned us, in the previous interview, of a sector rotation, which on Monday was a major business headline.
StockHouse: Last week, oil experts uniformly agreed that oil prices had peaked and would head lower. What happened today?
Fadel Gheit: Unfortunately, even experts miss the boat by a wide margin. Oil stocks are basically moving because of three factors. Number one, fundamentals. The fundamentals are improving, regardless of what the experts are saying. When we have $10 oil, only three months ago, and now we have $17 oil - you don't need to be an expert to know that we have an uptrend for oil prices. Why are oil prices moving up significantly? The production cuts by OPEC are here to stay and are for real. We are seeing here the strong underpinnings - stronger, sustainable, higher oil prices. I'm not saying we are going to see another 70% movement in oil prices, that we've seen in the past six months, but I am saying we are not going to go back to $10 oil. We are likely to move higher, and we are not likely to move lower. The trend remains positive although the pace will slow a little bit. Obviously, because it ran up to fast in a short period of time. These are the fundamentals. Now, the technical side of it is, is that there is clear sector rotation that has come upon us. Again, if you look at what investors and institutions are selling and what they are buying. They are selling growth, speculative stocks - mainly high-tech. And they are buying value. You have a clear market shift from growth to value. That is the first time in almost five years that a clear shift has occurred. Usually, when that is done, it takes between 8 and 10 weeks before we get to a parity. And we are still far from it.
StockHouse: Do you expect oil stocks to be heading higher, now that oil has established itself above $15/barrel?
Fadel Gheit: Correct, because it will establish itself as the most logical other alternative to those stocks that ran up on speculation. At least with oil stocks, there is no longer speculation. Because we have come out of these prices, people can verify that oil is up 70% over three months ago.
StockHouse: Are we going to start seeing "Strong Buy" recommendations from oil analysts?
Fadel Gheit: If they are not, they are too late. If they wait a little bit longer, maybe they'll be ready for their Sell recommendations. Most of these stocks are up 25%, 30%, 40% over the last six to eight weeks.
StockHouse: Do you think the market for oil stocks has peaked or close to a peak?
Fadel Gheit: We are not likely to see, especially in the large caps, a similar move to the upside. Actually, I downgraded Unocal, because it's up 41%. It's not an Internet stock. It still sells oil and gas. For a stock to go up 40%, unless there is a merger agreement or something, I don't see the fundamental support in such a huge jump.
Statistics do not support $20 oil or even $18 oil. They barely sustain $15 or $16 oil. We are way ahead of that. The traders anticipate and extrapolate a trend into higher and higher…Ultimately, the pendulum will swing too far.
StockHouse: What about the secondary oil stocks?
Fadel Gheit: The companies that have huge debt are shackled down. A lot of investors would prefer a large cap company or a small cap company that is free of debt. I would go first for the large cap companies, the strong balance sheet. People are coming to value stocks because they want lower risk. Enough of the high-flying Internet DOT com stocks. They want a complete mood shift or change, now, from the high-flying growth stocks with 700 multiples of earnings to down-to-earth value stocks. It's a sector rotation. It's cyclical. It's classical sector rotation. It's in the early stages of that. The risk of oil stocks going forward will likely be a market risk, not a sector risk.
StockHouse: What about the large caps that have made the strong advances in the past few weeks like Mobil, Exxon, Texaco?
Fadel Gheit: Very close to all-time highs. The typical crowd of the market of the past two years - once investors made their money - came from buying only 10% of the market. On large cap stocks - the big names, not the small-cap stocks. The same with the oil stocks. The big institutions are not going to buy the little guys; they are going to buy the big cap stocks. This is where they have room to buy. First they go for the meat and potatoes, and then they go for the salad. When an institution is going to build a position in a Mobil or Exxon, he is not going to buy 20,000 shares. He is going to buy multi-millions of shares. To own Exxon, he will own 10 million shares of Exxon, not a million shares.
StockHouse: Are we now going to see an explosion into the secondary and tertiary tier of oil stocks?
Fadel Gheit: Exactly. That is exactly what is happening right now. This is like the NFL draft. In the first round, you go with the big names. In the second round, you go for the no-names and so forth. You are first going to go with your Heisman winner, then the other names. Then, you'll go with what will be your safety or specialty units in the third round.
StockHouse: The last time we talked, you thought there might be a correction down to $15, before crude oil went higher. There was no such correction.
Fadel Gheit: But, it could still be. My downside risk for the price of oil is at $15. I still think it could touch $15, for one reason or another - if we hear that one or more OPEC countries are cheating, if we have hostilities in Europe to start subsiding, or if we don't have a full-fledged war. There are supply-demand factors. There is still oversupply, even though OPEC cut production. There is still inventory overhead. All these things have not disappeared overnight. What the market is doing is looking into the future, three to six months from now, and the market is forecasting we are going to have much more balanced supply-demand. That will push oil prices higher.
StockHouse: Do you think the front month contract of crude oil could break $20/barrel?
Fadel Gheit: I think it is possible, but I don't want to bet on it. One of the business problems - if it does - the crude market, the prices are being carried now more by momentum, than by fundamentals. Statistics do not support $20 oil or even $18 oil. They barely sustain $15 or $16 oil. We are way ahead of that. The traders anticipate and extrapolate a trend into higher and higher…Ultimately, the pendulum will swing too far. They will probably pick a price above $20 and then we are going to have a rude awakening - the price will get hammered down pretty hard. Once oil prices go above $18, there's going to be a "happy days are here again" and people will begin to celebrate too early - thinking the worst is over. Guess what? We are in a very tenuous situation. It will be very tempting for some OPEC country - the chronic cheaters of OPEC - to go back to their old games. They'll say, "Hey, that's easy money, we might as well." For a country that is in desperate need of money, cheating now is worth more. Now, when you steal, you steal big. Better to steal when oil is $20, than when it is $10.
StockHouse: Will Venezuela be the first to cheat?
Fadel Gheit: I think the countries that are under financial pressure will definitely cheat. The countries that have a history of cheating will cheat. Venezuela said it point-blank that it can not sustain its economy with this quota. They are not really smart because they are 70% better today, price-wise, but probably value-wise, they are down 10-15%. Net-net, or aggregate, they are up 50% higher in revenues - export-revenues today - than they were 6 months ago. Why end a good thing? Unfortunately, you can preach as much as you want, but people will cheat.
StockHouse: Thank you very much.
********************************************************************
Couldn't a said it any better myself!
Good to hear of your getting those things cranking again.
I still am leary about getting into oil production at this point, and in any event am not very liquid. Will keep you in mind for others though, although most folks here in the Boston area are ignorant of O&G. |
