Noble

APA - Apache Corporation (NYSE)

7/22/2005

Forbes
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With demand outstripping supply, oil prices are bound to stay high for some time. So oil stocks, despite big gains, still look good.

By Forbes.com

The price of oil is one very big factor that makes this stock market tough to navigate. Every time oil prices edge up, investors get nervous. In late June, when per-barrel costs moved above $60, the market swooned. Meanwhile, economic growth has slowed, along with employment increases. To further disconcert investors, prices of non-oil commodities and industrial materials are off.

Add in low long-term interest rates, whose nature is an enigma even to Federal Reserve Chairman Alan Greenspan. The holder of a 10-year Treasury gets only 4%, despite rising short-term rates and hints of inflation. A flat yield curve seems imminent, and that doesn't generally portend good economic times. Is what we're seeing simply a pause in a rising economy, or something much worse?

People, understandably, are wondering what to do.

Start investing with $100. Explore our new ETF center.

If you own bonds, keep your positions small and your maturities short, preferably under a year. If inflation accelerates, which appears likely, holding long bonds would take a chunk out of your capital. By staying short, you may not make anything after inflation and taxes, but you will keep your capital intact for opportunities ahead.

In your stock portfolio avoid deep cyclicals (autos, airlines, steel, heavy machinery) and other issues heavily dependent on riding a robustly growing economy. Even if economic growth ticks up from its current rate, the play in these stocks is over for a while. More attractive are health care and consumer staples, which are less sensitive to economic rhythms.

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Related oil commentary on MSN Money and Forbes

• 5 stocks playing catch-up with oil • Higher oil prices? It's worse than you think • The oil sector's real winners • Northrop Grumman's fight for a new warship • StockScouter stays strong with energy, housing • Read more on Forbes.com

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Oil: a good place to be
A truly good place to be during these times of rising oil prices is, yes, oil stocks. A year ago I gave some reasons why higher oil prices were likely to stick, such as surging Chinese demand and terrorism threats. I recommended ChevronTexaco (CVX, news, msgs), Kerr-McGee (KMG, news, msgs) and Burlington Resources (BR, news, msgs). Since then, including dividends, those stocks are up 26%, 47% and 54%, respectively.

The integrated oil companies, which encompass everything from drilling to gas stations, and the pure exploration-and-development companies still provide good value despite large rises in their stocks. Because their profits are up smartly as well, their price-earnings multiples have stayed low. The huge overhang of excess supply (2 million or more barrels a day for most of a generation) has disappeared and is not likely to emerge again anytime soon. Supply, with almost all oil-producing nations pumping at full capacity, is now 500,000 barrels per day below demand, according to the International Energy Agency's Oil Market Report. This will keep pressure on prices, even without disruptions from terrorists, labor strife or politically motivated cuts in output.

A year from now we will still be seeing significantly higher oil prices than were prevalent during the invasion of Kuwait in 1990 -- conservatively, $40 to $55 a barrel. Any crisis could push prices higher, perhaps substantially.

If oil prices hold near current levels, significant room for multiple expansion exists. Most companies have already paid down a good part of their debt and can now apply their enormous cash flows to share buybacks and dividend increases. Also, for both the smaller integrateds and the exploration-only groups, there is a good chance that the increasing pace of takeovers will continue.

Exploration outfit Anadarko Petroleum (APC, news, msgs), loaded with cash, is likely to increase its reserves by acquiring smaller explorers. Earnings should rise this year by 22% to $1.7 billion and continue rising in 2006. The stock trades at a P/E of 12 and yields 0.9%.

Apache (APA, news, msgs) is a similar company, with reserves in the U.S., Canada, the North Sea, Australia and Egypt. Apache put large amounts into exploration -- a planned $2.75 billion this year, compared with $2.45 billion in 2004. Production thus far this year has increased 7.5% as a result of the stepped-up capital spending. Apache trades at a P/E of 11 and yields 0.5%.

Canada's EnCana (ECA, news, msgs), a large producer of oil and natural gas, should benefit from both higher prices and increased production. Encana is selling most of its noncore assets, such as its gas-storage business, and is using the proceeds to reduce debt and buy back 10% of its shares. The stock trades at a P/E of 12 and yields 0.7%.

Occidental Petroleum (OXY, news, msgs) produces oil and natural gas, as well as chemicals. The company is having a banner year. Earnings should rise at least 20% in 2005, with strong results likely to continue. Occidental trades at a P/E of 11, yielding 1.6%.

By David Dreman. Dreman is chairman of Dreman Value Management of Jersey City, N.J. His latest book is "Contrarian Investment Strategies: The Next Generation

GSF - Globalsantafe Corp (NYSE)

7/22/2005

 

SCHLUMBERGER LTD - New York Stock Exchange: SLB (NEW charting help)

Enter Symbol or Keyword: Time Frame:   1-day2 days5 days10 days----------1 month2 months3 months6 monthsYTD1 year2 years3 years4 years5 years1 decadeAll Data Additional chart controls  SLB - Schlumberger Limited (NYSE) 7/22/2005

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NE - Noble Corporation (NYSE)

7/22/2005