by Ivan Martchev | April 28, 2011 12:00 pm
Two weeks ago, InvestorPlace.com ran a story on five reasons why oil will rally again. Since then, West Texas Intermediate (WTI) — the benchmark for crude oil pricing in the United States — has steadily climbed about $5 per barrel.
Demand for oil is seasonal in nature, and summer tends to be a strong time of the year. I fail to see how with increased seasonal demand, decreased supply due to tensions in the Middle East and North Africa, as well as a relentless surge in demand from emerging markets that is much faster than that from the developed world, the price of oil will see any meaningful correction here. Yes, corrections are possible, but they should be treated as buying opportunities en route to higher prices.
How high will oil prices go this summer? Well, do you think the unrest in Yemen and Bahrain will spill over into Saudi Arabia? And what are the chances that the Libyan situation will be resolved in the next couple of months? Given these global factors, coupled with the bullish seasonal and secular factors I outlined earlier, oil could go as high as $150 per barrel or more.
So let’s take a look at the best oil stocks to buy now:
China National Offshore Oil Corporation (NYSE: CEO) had a slow start to 2011, due to the spectacular performance in 2010. And it was normal to see a correction as there was some institutional allocation out of emerging market equities into developed market equities in the beginning of the year. As discussed here before, those are short-term institutional moves that may cause a correction in CNOOC and broader markets in general, but that is unlikely to become a long-term trend.
With stellar earnings in 2010, and 35% percent EPS growth expected in 2011, the 13 P/E that investors now pay for this oil stock is cheap, despite the triple-digit share price.
See: 3 Rising China Plays for the End of the Age of America
Lukoil (OTC: LUKOY) is cheap right now. I don’t agree with many of the policies of the Russian government toward foreign investors, but there are signs that things are changing for the better. We have heard this talk from the Russian government before, but now we are beginning to see concrete actions.
The value of Lukoil comes in its easy-to-tap oil reserves that are currently the third largest in the world of any publicly traded company. Not even my favorite CNOOC has that much in oil reserves, so even though investing in Russia carries its risks, the cheap valuation of the 6 P/E is well worth the potential reward from being a long-term shareholder in this oil stock.
British Petroleum (NYSE: BP) made a lot of enemies last year with the Gulf oil spill, and at one point, amid fire sales of assets, it looked like the company might be split up. But new U.S.-born CEO Bob Dudley has done a masterful job of navigating the turbulent situation and even managed to strike a lucrative deal with Russia-based Rosneft to essentially buy back all the reserves he sold at less than half the price he originally had to sell them for.
While BP earnings are a mess due to the numerous charges and the need to create $41 billion in reserves in order to pay for the oil spill, I like how fast the new CEO is completing a turnaround that will ultimately make BP shareholders very happy with the current triple-digit price of oil. The company will restart drilling operation in the Gulf of Mexico, and as it ramps up production globally, I expect the oil stock to continue recovering.
One Latin American country with huge potential to ramp up oil production is Colombia, which is South America’s third-largest oil producer after Venezuela and Brazil. The only way to play that for U.S.-based investors is to buy Ecopetrol (NYSE: EC), which is listed on the NYSE as an ADR. The company is huge with a market cap of $68 billion, but very little debt. EC plans to invest $80 billion through 2020 to more than double daily output to 1.3 million barrels of crude.
The company’s reserves are primarily concentrated in Latin America, and EC is expanding its search for oil in Colombia, Brazil, Peru and the Gulf of Mexico. In fact, Colombia will use its armed forces to help search for new reserves of oil. And with great progress being made by the government in oil-rich territories previously held by guerillas and drug cartels, I expect Ecopetrol to capitalize nicely on the new opportunities.
The multiple of 12 times forward earnings is cheap based on the expected 58% surge in 2011 profits. Plus, this oil stock pays a nice 2.7% dividend.
PetroChina (NYSE: PTR) is larger than favorite CNOOC and, therefore, does not grow as fast, but you can get it at a cheaper price. It was Warren Buffett’s investment that sent the stock into overvalued territory three years ago, but after he sold the stake, shares are now remarkably depressed. They trade at just nine times forward earnings, with earnings growth forecasted to be 24% in 2011, probably based on a much lower average oil price than we have at present.
Most earnings estimates for major oil companies had taken into consideration a sub-$100 average oil price for 2011. So, if the price of crude surges based on the factors I outlined earlier, cheap oil stocks like PetroChina will see strong performance by the end of 2011.
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