Oil industry executives are partying like its 1999. Actually, out in the oil patch it looks more like the roaring 1920s as oil speculators rake in more money than they ever thought possible.
And this is an industry in need of billions of dollars in tax payer subsidies?
Take Devon Energy (DVN) for example. This $40 billion market cap oil and gas exploration company posted a net income of $1.3 billion for the quarter.
This company is absolutely gushing money.
Devon Energy made $3.39 well above Wall Street estimates of $3.28 per share. As one would expect, the stock rose higher on this news and is trading around $91 per share. This action reverses the selling of Devon Energy that began in July when shares were at $120.
This means that from here on out, there are only two moves for DVN to make: Up or down.
Is the Party Over for Oil?
If you are of the opinion that oil demand will continue to outstrip supply, today very well may be a great buying opportunity. Go ahead and buy to your heart’s content.
On the other hand, if you believe that oil conservation, combined with mass investment in alternative energy (see, “Alternative Energy: Ride The Green Wave”) will result in supply outstripping demand, then DVN gains today represent a prime selling opportunity. Is this article ready? If not, let’s not postpone posting this stock story. Let’s just link to a different article.
As a Rational investor, I’ve always believed that oil prices trade at speculative levels (see, “The Oil Stock Pyramid Scheme”).
Fundamentals, according to most oil industry experts, suggest a price per barrel that is well below $100. Forget about future increases or decreases in demand, the pros say that oil is priced to high at current fundamentals. Therefore, the party is about to end in the oil wells and investors need to get out.
Oh sure, DVN trades for a low valuation you say? Indeed, valuations based on traditional fundamental measures (like price-to-earnings) are low. But the problem is that revenues are artificially high, and should those revenues fall the valuations would fall and fall hard.
History Repeats Itself
Remember what happened to semiconductor stocks in 2000? The growth of the Internet resulted in unprecedented revenue growth for chip makers. As a result, semiconductor stocks soared, yet valuations remained cheap. Well, that ended in a hurry with the dot com crash, didn’t it?
Another prime example can be seen in the current state of the homebuilding industry. The boom in housing resulted in revenue growth that fueled stock gains. That boom went bust when gains evaporated and housing revenues collapsed. I can’t tell you how many value managers told me to buy semiconductor and housing stocks at their peak valuation (see, "Stock Market Anticipation is Worth the Wait").
In my Rational opinion, the same exact thing is happening in oil. I would avoid DVN like the plague. After all, history tends to repeat itself.
This article was written by Jamie Dlugosch, editor, InvestorPlace.com. For more actionable insights likes this, go to: www.InvestorPlace.com.
