One of the reasons I have been bullish on energy stocks is that supposedly many brokerage firms use very low estimates for crude in the modeling.
I found an example of this today from Jyske Bank, which is a Danish bank. I read their commentary regularly because it is a good source of news and they offer opinions on a lot of the countries I care about including Norway.
Jyske recently issued a report (the link is to a PDF) on Statoil (which I have owned personally and for clients for about a year and a half). In the report they raise their price target on the stock slightly and they also raised their price target on oil slightly as well. Their old estimate for oil was $38 and the new target is, are you ready, $41. I don't have enough fingers and toes to count how far below current prices that is but I think it is a lot.
To be clear, their new price target is NOK 215 based on $41 oil. As more time goes by with oil in the $60s and $70s it should make earnings estimates look very low.
That is the thinking anyway, and I buy into it.
Don't take this as a call to buy Statoil. I have owned it for a while because I believe anything that is good for oil is good for Norway. This is a long term theme for me. In that belief I bought some last week for a new client before this last run up above $30 for the ADRs. Just like with Suncor, if oil goes down $10 Statoil will get smacked.
Wikinvest Wire
7 comments:
I agree with the general thesis about oil & have my $ committed that way also. BUT, the $41 they quote and the current $75 may not be for the same grade of oil. The headline oil prices are for high grade varieties (light sweet) but many others are also sold and the lower (heavy sour) sell at substantial discounts to the good stuff because they are more difficult to refine.
Having said that, the estimates tend to be painfully conservative, just not quite as conservative as they may seem at first. The trick here is to figure out the grade the company tends to deal in and what it is actually trading at.
Paul
Brent crude is supposedly a little heavier but that is in the $70's and for quite a few weeks has been higher than west texas. the other grade that I know of is Dubai which is much heavier. I do not know where dubai is price wise but I recall when west texas was around $55 dubai was at $39. that being said i have never heard of any stock research using anything but WTI.
Lower grades/types of oil tend to be sold on linked contracts. I.e A Brent Heavy Sour Oil would be sold for 0.7345x of the benchmark contract. Setting multiples like this greatly simplifies market pricing and price discovery, since only the benchmark crude needs to be traded.
There is a surprisingly small amount of West Texas Intermediate Crude being produced, even though huge amounts of North American oil are benchmarked to its price.
Oil companies are the most conservative among all indutries. Not too long ago their exploration and development projets were based on $20/barrel of oil. No wonder they had blow-out earning surprises. In Saudi Arab the total cost of per barrel of oil produced counting all the investments, pipelines, pumps etc is probably less than $10/barrel. Oil is really a commodity and should be priced like grains, corns and water. However, the demand/supply inbalanced has cause oil to be priced as a speciality worthy of some serious currencies.
An ex-oil man.
I agree with ex-oil man. I played golf with an oil geophysicist last year - well, he was playing golf, god knows what I was doing - and he commented that all the companies he worked with were quite profitable at $25/bbl. He didn't go into detail WRT margins, price differences between crude grades, etc. but the message seemed pretty clear, at least to me; you don't know what a cash cow is until you see a well run oil company at $50/bbl and higher oil.
Given the geopolitical risk premium currently attached to oil production it seems likely those kind of high prices will continue.
That has been the secret of XOM. XOM's investment projects, under Lee Raymond have all been designed to be proftiable with oil at $25 a barrel. So when oil costs $75, XOM does ok.
Thats the key difference between XOM and the newer oil players like the canadian oil sands companies. COS players have extraction and processing costs well north of $25 a barrel b/c of all the energy needed to mine and melt oil sands. These operations would be marginal if oil cost $40 a barrel.
IMHO when the chinese are done with their build out of oil infrastructure in Sudan/Iran/Burma, world oil prices will drop a fair bit. These countries have a fairly decent amounts of oil that is off limits to western companies.
Sudan has plenty of oil, but western oil companies will not/can not touch it. XOM etc wouldn't dare be associated with the grusome government of Sudan. Sinopec/CNOOC are far less sqeamish.
Given the possibilites, I think owning Sep 06 calls on PBW @ 23 which cost $160 may be a good idea. A few more months of oil at $75 and PBW will be at 25 or higher.
I am thankful for Market Particiapnt's comments. They tend to take the other side of my trade on a regular basis which provides diverse opinions on one site.
"China being done with its buildout" is not something that I would bet on. No one there has a car (hyperbole). If just a measurable portion of the population gets one in the next ten years demand will sky rocket.
How far behind India is China because the idea works there as well.
How far is Vietnam behind India? There are other countries where per capita oil consumption is at a barrel or less. Per capita consumption in these palces will go above 1 or even 1.5 in the next few years, maybe it takes a decade, thhis will require big changes somewhere.
Long time readers will recognize the barrel per capita idea as being from Puru Saxena.
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