Daily Gains Letter

U.S. Oil Boom for Real—Production’s Gushing in Many New Regions

By for Daily Gains Letter |

DL_Feb_20_2013_MitchellIt’s boom time in the domestic oil business, and production is on a big-time upswing after years of decline. New technology is helping, but so is a willingness to look for oil in non-traditional places, like North Dakota and Montana. And it’s all happening in the face of oil prices that seemingly refuse to cross the $100.00-per-barrel threshold.

But it isn’t just oil. Today there’s a glut of natural gas, and prices have taken a hit. There is solid potential for oil prices to advance this year, but in order for this to happen, both the China and the U.S. economy have to show more growth.

Global demand for oil continues to be solid, and 2013 consumption growth is expected around its normal average. With the big increase in domestic oil production, it’s fair to say that oil prices are actually holding up well. One thing that isn’t happening is the stock market is no longer trading off oil prices—that metric has gone by the wayside for now.

Typically, you can’t go wrong owning one of the integrated oil companies. The fact of the matter is that the only way to beat higher gasoline prices is to own a piece of the company. Large-cap oil producers like Exxon Mobil Corporation (NYSE/XOM) and Chevron Corporation (NYSE/CVX) have done exceptionally well on the stock market over the long term; and this doesn’t include dividends paid, which are substantial.

To be a buyer of large-cap oil now, the near-term return would be dividends only, as these stocks are fully priced and oil prices seem stuck in their range. There are a considerable number of new oil producers that are making hay in the new hot areas; but even with their substantial growth, these stocks won’t move without rising oil prices.

I think if you want to have exposure to oil and gas in a stock market portfolio, two companies would be useful. One would be a growing junior oil play along, the other would be an integrated producer that pays dividends. With oil prices stuck below $100.00 a barrel, the current environment isn’t a bad time to be a buyer. A number of growing junior oil plays are well down from their highs, because oil prices aren’t moving.

And this is the real kicker when investing in resource stocks: no matter what the growth story, these stocks aren’t really going to move unless oil prices are doing so at the same time. And the other reality is that oil stocks will typically move lower at a faster rate than oil prices on a downtrend. It’s the reality of resource investing, and you can’t get away from it.

Valuations among many oil stocks are very fair these days; even for the faster-growing, smaller players. For smaller companies growing their resource estimates in North Dakota and Montana, the case for owning these stocks will get better. The key, of course, is oil prices. If oil can get above $100.00 a barrel, then we’re going to see a huge amount of new capital allocated to exploration and development in the U.S. Right now, it is a good time to be in the oil patch, and domestic oil production is really on the upswing. Along with Canadian oil, the U.S. will likely become energy independent before 2030.


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