Saturday, June 03, 2000
The Sophisticated Investor
Gas price increase could pump portfolio
By John Waggoner
USA Today
Let's take a trip down memory lane to the carefree 1970s. Remember those goofy fashions? How about disco? And what about those zany, soaring gasoline prices?
Fortunately, we don't have to relive the '70s, a decade with all the appeal of malaria. But fuel prices have soared since 1999. You may be able to take some of the pain at the pump and translate it into gain in your portfolio.
The price of a barrel of West Texas intermediate crude oil has soared from $12 a barrel in February 1999 to $30.14 this week. Since then, the average natural resources fund has risen 61 percent, vs. 13 percent for the Standard & Poor's 500-stock index and 40 percent for the Nasdaq Com posite Index.
By most accounts, that's a pretty good run.
But oil-patch experts are pounding the table for oil stocks, particularly those whose main line of business is looking for more oil and gas. John Tozzi, CEO of Cambridge Investments, a San Francisco hedge fund, puts it most succinctly: The balance between supply and demand for oil and gas is tight. “The only way out of the problem is through the drill bit,” he said.
In North America, the number of rigs drilling for natural gas is reaching an all-time high. Normally, many rigs means overproduction, which means lower prices. But prices are still strong.
Why? “Gas fields are smaller and depleting more rapidly,” Mr. Tozzi said.
In short, it's a good time to be a gas driller. “Demand for natural gas is up about 2 percent to 3 percent a year, supply is down, and there's not enough gas coming online,” said Scott Offen, manager of Fidelity Select Energy. “Land drillers that have a lot of exposure to natural gas will do very well.”
Quick! Name a natural gas drilling company! If you can't, don't worry. You're not alone. But Dolores Bamford, manager of Putnam Global Natural Resources, likes Nabors, one of the world's largest drilling contractors. It's pricey: The stock currently sells for about 56 times its next 12 months' earnings.
But it also owns about 60 percent of rigs that can drill 15,000 feet or more — typically the ones used for natural gas, said John Segner, portfolio manager of Invesco Energy. That could mean better-than-expected earnings growth.
He also likes Coastal, which focuses on oil and gas in Texas, the Gulf of Mexico and Rocky Mountains.
Cambridge Investments' Mr. Tozzi likes the market for international oil drilling. Global oil excess capacity — the amount drilled above what we consume — is low. “In 1981, we had 37 percent to 38 percent global excess capacity,” he said. “That has been reduced to 4 percent today.”
The OPEC factor
The great governor of global oil production is the Organization of Petroleum Exporting Countries. All but three OPEC producers, however, are running at full capacity. “Without increased capital spending, Iraq and Libya are tapped out,” he said.
That capital spending — in the form of more rigs — will benefit oil services companies.
Mr. Offen said that OPEC, as well as the big oil companies, have to increase capital spending 10 percent to increase production 1 percent. That will benefit drillers and the big, integrated oil companies.
Furthermore, should Europe's economy continue to grow, demand for oil will grow as well. The final wild card: China.
Mr. Tozzi said that natural gas generates only 2 percent of China's power needs. But the Chinese government expects that natural gas will power 20 percent of China's power needs by 2020. And China, which exported oil until 1997, is now an oil importer.
Other options
You could, of course, invest in big integrated oil companies, such as ExxonMobil. They are not likely to be as exciting as a small oil and gas driller, but they are not as likely to explode, either. Or you could invest in a natural resources fund.
Some of the best are:
• Fidelity Select Energy Services (800-544-8888), 40.4 percent return in 2000, 216 percent in five years.
• Invesco Energy (800-525-8085), 34.1 percent return in 2000, 147 percent in five years.
• Excelsior Energy & Nat Resources (800-446-1012), 24 percent return in 2000, 141 percent return in five years.
• Fidelity Select Energy (800-544-8888), 21.2 percent return in 2000, 118 percent return in five years.
• Fidelity Select Natural Gas (800-544-8888), 35 percent return in 2000, 110 percent in five years.
Average return for 2000 for a natural resources fund is 13.3 percent, according to Lipper, and 59 percent for five years.
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