|
Just in the last three days, Weatherford International has jumped 8%, Denbury Resources has jumped nearly 6% and the Oil Service HOLDRs index (OIH) — an exchange-traded fund (ETF) comprised of 18 oil industry companies — is up 5%. The power of this move up is surprising, even to me. But when I step back and look at the big picture, it’s hardly surprising at all — for two reasons … First, earnings in the energy sector are surpassing even my bullish estimates. ExxonMobil had over $9.9 BILLION in earnings in its third single quarter, a world record that’s roughly equivalent to the entire gross domestic products of rich countries like the United Arab Emirates and Kuwait … Royal Dutch Shell, $9.4 billion … British Petroleum, $6.5 billion … ConocoPhillips, $3.8 billion. Second, a few months ago, when China National Offshore Oil Corp. (CNOOC) made a bid to buy California-based Unocal, I virtually pounded my fist on the table, alerting readers that it marked the beginning of a major takeover wave in the energy sector. Now it’s picking up steam: Chevron’s Unocal buy-out for $18 billion … Kinder Morgan’s purchase of Terasen at $5.5 billion … Occidental Petroleum’s deal for Vintage Petroleum at $3.8 billion. Why This Is Merely the First Round of Mega-Profits and Why the mega-profits? For the same reasons I gave you last time: Huge, burgeoning worldwide demand for energy and energy services, generating surging revenues. Why the merger boom? For the same reasons I gave you months ago: Merger targets with huge, undervalued petroleum reserves … plus big buyers with equally huge cash hoards. Of course, I wish I could have caught the exact bottom of the recent correction in energy shares. But what’s more important is that we’re still on the same highway — a virtually unstoppable bull market in oil, energy and other natural resources. Why This New Merger and Acquisition Chief reasons… Reason #1: Oil prices have more than doubled in the past year, from $27 a barrel to about $60. And despite the recent dip in prices, worldwide demand keeps exploding higher while supplies keep dwindling. Reason #2: China and India are desperate for energy supplies. On a per capital basis, China consumes 1.8 barrels of oil per person per year compared to 25 barrels per person per year in the U.S. In other words, someone in China consumes about one-fourteenth of what the average consumer uses in a year here in the U.S. Now, fast forward to 2010, just over four years from now. And make the conservative assumption that, despite China’s rapid modernization, its per-capita oil consumption will rise to only one-FIFTH of ours — or 5 barrels per year per person. With 1.3 billion people, that means the world would have to produce an additional 17.8 million barrels of oil per day. That’s just four years from now but the existing global capacity to produce oil can barely handle an additional 1 million barrels per day. Add in India’s growth, and you’re looking at a world where over 120 million barrels of oil per day will have to be produced, nearly 50% more than today’s peak production level. That’s nearly impossible given declining supplies. It means oil and gas prices are likely to rise for years. Reason #3: Even at today’s energy prices, most oil and gas companies are undervalued! I made this abundantly clear last June when CNOOC made its bid to buy California-based Unocal. While everyone else was caught up in the idea of a Chinese company buying a U.S. oil company, I stated the obvious: Because of the undervaluation of oil reserves, it’s actually cheaper to buy an oil company today than it was a few years ago — even though the price of oil has more than doubled. For instance, in the case of Unocal, the price of oil shot up from $38 to over $60 a barrel, but the relative value of Unocal’s oil reserves had actually declined from 14 cents on the dollar to just 9.5 cents on the dollar! And Unocal is hardly the exception. There are dozens of small, medium and large oil and gas companies whose reserves are currently undervalued by the markets. For instance, one company I’m eyeing right now is in a similar situation. It has over 2.3 billion barrels of desperately sought after oil-equivalent reserves. They’re all over the globe — in 12 different countries. Its balance sheet is a gem to behold. Hardly any long-term debt and plenty of cash on hand. The share price is trading at just 2.14 times book value and just 11.37 times earnings. The real clincher is how the company’s oil reserves are valued. Based on the current market value of this company’s shares, its oil is being valued at a mere $6.57 a barrel, or just 11 cents on the dollar. A second energy company I’m looking at owns 2.1 billion barrels in oil and oil equivalent reserves. But it’s at $60 oil and at the company’s current share price, I figure its reserves are being valued at a mere $8.57 per barrel, or just 14.3 cents on the dollar. When you can buy a commodity in great demand and limited supply for as little as 11 cents on the dollar, you can see the reason why I expect a continuing bull market in energy shares and a massive merger and acquisition wave. My Short Takeover Candidates Here’s a short list of oil and gas takeover candidates on my radar screen.
You can run out and buy some of these if you wish. But for the equivalent of just a few cents a day, I think you’ll be far better served if you use the complete list, the specific picks and timing signals in my Real Wealth Report. And for maximum profit leverage — combined with strictly limited risk — consider the high-powered trading recommendations in my Energy Options Alert. Another Imminent Takeover Wave: Like the energy sector, gold and natural resources have many of the same attributes that are combining to create an immensely profitable takeover wave: Companies based on tangible assets in great demand but limited supply. And big cash hoards. But not all mergers and acquisitions — even in the gold market — are good. Example: Barrick Gold’s recent $9.2 billion bid for Placer Dome. Barrick is a fully hedged gold company, selling all its production forward in the futures market. It locked in its profit margin years ago, and as a result, Barrick Gold’s share price is one of the worst performing gold shares in the sector. It’s a gold stock I warned everyone NOT to buy. Barrick’s target, Placer Dome, also does a lot of hedging. If the combined hedging operations produce more lost profit opportunities — or even outright losses — I’m afraid the new entity could become a dinosaur. My recommendation: If you own Barrick Gold, for whatever reason, get out. Same for Placer Dome. Take your money off the table, and instead turn to … My Short List of Takeover Candidates Here are what I believe to be the prime takeover candidates in gold mining, steel, water and other leading natural resource sectors where big money is now headed …
Again, you can buy some of these if you wish. Or you can get my complete list, including my specific picks and timing signals from my Real Wealth Report. On Tuesday, former Fed Chairman Paul Volcker warned that inflation may be getting out of hand “and the United States better watch out.†I agree. Inflation is poised to move much higher in the months ahead, and natural resources, already in limited supply and under intense demand, are going to continue to surge. An important message to Real Wealth subscribers: Despite recent swings in the markets, your portfolios are performing nicely. Some examples: Just since the end of June, you should be seeing gains of as much as … * 13.7% in your gold shares * 22.4% in your natural resources portfolio * Not to mention recent gains of up to 7.8% in the Morgan Stanley India Investment Fund and up to 8.3% in the India Fund — in less than three weeks! So don’t let the temporary ups and downs in this market bother you. Hold all positions. And stay tuned for my next issue, coming November 18. Best wishes for your health and wealth,
About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
||||||||||||
9 Oil Takeover Candidates
Oil and energy stocks have suddenly found the bottom in their correction, sprung back to life, and started surging toward their recent record highs. Previous post: GM, Ford, Dell and YOUR Best Defense
Next post: Bonds Falling!
