The energy debate rages on as oil and gas futures bounce around with 30% corrections. Which side of the energy debate are you on? Bears say that oil and gas prices are coming back down to earth. Speculators and hedge funds bid them up, global demand is slowing and alternative forms of energy will soon replace the fossil fuels we've come to depend upon. Bulls argue that oil and gas supplies are dwindling at the same time that the emerging market economies (China, India, Brazil and 20 others) need more. As their middle class population builds they too will want cars, air conditioning and electricity and demand will increase. Most oil reserves are in countries with unstable governments and when geopolitical events get ugly, prices tend to skyrocket.
I'm a long term energy bull -- 10% of my money has been in energy stocks for the last several years and today I maintain that allocation for two reasons. First, I believe in five years, oil and gas prices will be higher than they are today. Second, owning energy is a great hedge against other asset classes like stocks, the US dollar, and inflation.
No one knows which way energy prices will go next week or month so I continually rebalance my portfolio. As my energy stocks rise, I trim them and when they fall, I add to them. If my portfolio goes to 12% energy, I sell them back down to 10% and vice versa.
Now comes the easiest part – which stocks do I pick? Easy you say? Yes – because I don't worry about stock picking due to a miraculous new invention I'll discuss below. I own three energy stocks: the U.S. Oil & Gas Exploration & Production Index (NYSE:IEO), the U.S. Oil Equipment & Services Index(NYSE:IEZ), and S&P Global Energy (NYSE:IXC). Through these three stocks, I own about 200 energy stocks in precise allocation percentages to parts of the energy sector, weighted according to my own preferences – 60% is in IEO, 30% is in IEZ and 10% is in IXC. Why pick stocks when I can own them all? Here's what I mean.
TheStreet.com's Jim Cramer says these stocks rise because they're doubly blessed. Integrateds fall because they aren't.
So many people have been puzzled why the major integrateds have not moved with the last $30 rally in oil's spot price. The answer?
They can't take advantage of it.
They either didn't believe, and therefore didn't drill, or they have been so in the crosshairs of sovereign lunacy that they haven't been able to. They didn't have the rigs or they judged that the rigs were so expensive that, like 1980, they would look like dopes when oil came back to $40-$50, where many thought it would. (Go back and check even last year's research for price targets, most of which were from the oil companies' themselves.)
Or maybe it didn't matter anyway. So many of the contracts these companies have signed with governments around the world are either being abrogated or just outright confiscated that you have to ask yourself "Who can invest under those scenarios?" Exxon (NYSE: XOM) (Cramer's Take) in Venezuela. Shell (NYSE: RDS.A) (Cramer's Take) and now BP (NYSE: BP) (Cramer's Take) in Russia. You can't continually invest billions and then write it off because the contracts you wrote don't mean anything.
XTO Energy (NYSE: XTO), a major oil and natural gas producer, has agreed to shell out $4.2 billion for privately held Hunt Petroleum. The deal is expected to add about 1.052 trillion cubic feet of natural gas reserves, located primarily in Texas, Louisiana and the Gulf Coast, to XTO's supplies.
XTO has been quite acquisitive lately. Only in late May, XTO agreed to pay $1.85 billion for Headington Oil Co., which may have 4.3 billion barrels of recoverable oil.
Yes, such deals are a wonderful way to bulk up for growth. Actually, XTO is projecting production growth of 28% to 30% for this year.
As for Hunt Petroleum, it's a legend in the oil business -- going back 80 years. But late last year, the board retained Goldman Sachs (NYSE: GS) to seek out a buyer (I'm sure the Hunt family was looking for some liquidity, especially in light of the surging energy market).
And so far, Wall Street likes the deal. In today's trading, XTO's shares are up 3% to $69.93.
TheStreet.com's Jim Cramer says as crude goes higher, it makes more and more sense to go for other energy options.
Every day that oil goes up, there is a new set of technologies that had formerly been priced out of the market that comes back to life. Let's take wind. Wind, in itself, just seems so stupid. It needs, well, wind. Much of our country doesn't have enough wind to make this economic. There are only certain regions that can really benefit.
But when oil is at $130, SO WHAT! The parts of the country that have a lot of wind are nuts not to do wind. Wind, when properly integrated into the grid, costs 4 cents a kilowatt. The issue has been shortage of everything that goes into a windmill, because nobody in the chain thought it was worthwhile to mass-produce them. So even though the cost is low, no companies felt it was worth it because the market seemed so niche.
In other words, it was the wind supply chain that was the problem, because we only thought in terms of gigantic plants that created energy. But with nuclear not an option -- never will be in this country, if you ask me -- natural gas falling out of favor post-Katrina as being unreliable, and coal simply intolerable because of the climate problems, wind has become the most natural fuel of all.
TheStreet.com's Jim Cramer says lots of companies now thrive with crude up here.
Oil's not a tax on everything -- it's a tax on the consumer. That's what I come down to when I see the charts this weekend and ponder what's happening in so much of industrial America.
Company after company that I examine -- the new techs, as I call them -- actually benefit from higher oil prices. Or they can pass them on with ease, because of the worldwide demand being so strong.
Take all of the companies involved with making a Boeing (NYSE: BA) (Cramer's Take): Boeing itself, Alcoa (NYSE: AA) (Cramer's Take), Honeywell (NYSE: HON) (Cramer's Take) and Precision Castparts (NYSE: PCP) (Cramer's Take) being good examples. Each of these is necessary because the new Dreamliner burns lots less fuel, and with fuel the biggest airline cost, it stands to reason that higher energy prices make the plane more desirable even at a higher price point.
TheStreet.com's Jim Cramer says it's not a strong-dollar sell -- the story here is still too good.
Why did natural gas go down last week? What was that? Inventories were down. The commodity price was up. The fuel itself is green. It is better than ethanol and it is being used to fuel an increasing numbers of cars and trucks.
The whole move down had to have been triggered by something, right? Yeah, how about the fact that the stocks were up a lot and were due for some profit-taking.
Recall that the real "reason" they went down is that the dollar "got strong," and that was supposed to trigger commodity deflation; natural gas is a commodity and is therefore going to go down. (Barron's made this very case this weekend, oblivious to the facts, but loving the theory.)
This kind of thinking is just so stupid that it shows you can get chance after chance after chance to own the fuel that can take care of the nation if we just let it. Of course, the stocks began to come back later in the week as threats of supply cut-offs of crude -- they came true this weekend -- made natural gas declines virtually impossible, despite the "sense" that it peaked. So the money has came back and I believe will continue to come back.
"After coal, natural gas is the No. 2 source for power generation; and the largest source of gas production in the US is now unconventional reserves," explains Neil George.
"Unconventional reserves now account for close to 40% of all domestic gas production. In addition, with the possible exception of deepwater fields, unconventional production is the only domestic source of gas that's likely to show real growth in coming years.
"The term 'unconventional' refers to any gas field that can't be produced economically using traditional well technologies. But, using a combination of new techniques, wells drilled in unconventional fields are prolific producers. US natural gas producers remain on a 17%-plus tear in gains so far this year.
In this investing environment, it's best to consider a defensive play or two, and while the oil/gas sector is not a defensive, strictly speaking, XTO Energy comes close to fitting the bill, and is worth an evaluation.
XTO Energy (NYSE: XTO) buys primarily demonstrated oil/gas properties -- areas where the commodities are 'known,' if you will - - then produces and markets natural gas, natural gas liquids, and crude oil, primarily.
XTO owns interests in more than 18,800 wells and operates gas gathering systems in Arkansas, Oklahoma, and Texas.
MOST NOTEWORTHY: WSP Holdings, Harris and XTO Energy were today's noteworthy initiations:
Oppenheimer believes WSP Holdings (NYSE: WH) is benefiting from rapid growth in the oil and gas exploration market and a move toward deeper and harsher environment drilling. The firm has an Outperform rating and $9.50 target on the stock.
UBS assumed Harris (NYSE: HRS) with a Buy rating and $63 target, as they see upside to the company's FY09 estimates driven by RF Communications. UBS views the recent pullback as a buying opportunity.
Morgan Keegan is positive on XTO Energy's (NYSE: XTO) projected 20% production growth, value building through acquisitions, and valuation; shares were initiated with an Outperform rating.
OTHER INITIATIONS:
Goldman started Philip Morris (NYSE: PM) with a Buy rating and $60 target.
MOST NOTEWORTHY: Energy companies, Regulated and Diversified Utilities and Tailsman Energy were today's noteworthy upgrades:
Bernstein raised its 2008 oil forecast to $92.30/bbl, up 27%, and 2008 natural gas forecast to $8.30/mcf, up 7%. By 2012, the firm expects oil prices to be around $86/bbl and for gas to be $9.2/mcf. The firm upgraded Apache Corp (NYSE: APA) and XTO Energy (NYSE: XTO) to Outperform from Market Perform and EnCana (NYSE: ECA) to Market Perform from Underperform.
Goldman upgraded the Regulated and Diversified Utilities sub-sectors to Attractive from Neutral citing expected economic weakness, positive commodity exposure, and earnings growth. The firm upgraded American Electric Power (NYSE: AEP) to Buy from Neutral.
Citigroup upgraded shares of Tailsman Energy (NYSE: TLM) to Buy from Hold ahead of the company's annual meeting as they believe it will announce a new strategy of low risk resource development on existing acreage and that shares will react positively.
TheStreet.com's Jim Cramer says there are some names that will work here, but they're a small slice of the total market pie.
Can someone, anyone, tell me why we can bank on this Fed? "The Fed has to cut 50 basis points or we are going to Dow 12,500."
Yeah, OK. I get it. Fed panicked and cut 50 last time we were shocked with a weak employment number. Maybe they will do it again.
But I look at it a different way. This Fed thinks it is smarter than all of us. It looks at ways to tinker to bring down the short-rates without attacking them head on. They are clever.
The market in late 2007 and early 2008 -- how shall one put it? Well, diplomatically, there are a few uncertainties to keep investors awake at night: subprime mortgage defaults, the extent of the credit crunch, the price of oil, inflation, geopolitical concerns, to name just a few.
In this climate it's best to consider a defensive play or two, and while the oil and gas sector is not defensive, strictly speaking, XTO Energy comes close to fitting the bill. That's because XTO Energy (NYSE: XTO) buys primarily demonstrated oil and gas properties. XTO owns interests in more than 18,800 wells and operates gas gathering systems in Arkansas, Kansas, Oklahoma, and Texas.
Analysts expect oil and gas production growth of 17%-20% in 2007, and 14%-17% in 2008. Analysts also like XTO's 6.9 trillion cubic feet of proved natural gas reserves. Look for natural gas to play a larger role in the United States' energy use, amid sustained high oil prices and increasing environmental awareness. The Reuters F2007/F2008 EPS consensus estimates for XTO are $4.40/$4.33.
TheStreet.com's Jim Cramer says you have to be bullish on the commodity when we're using more of it than ever, it's running out and $100 a barrel doesn't even sound crazy anymore.
Can you trust the International Energy Agency to be right about how oil demand will be blunted by high prices and how consumption will decline?
First, let's deal with demand. I haven't seen any slowing in demand in any of the indicators I use, in part because gasoline hasn't kept pace with the commodity. Cars, certainly, haven't made any strides in using less gasoline, and news right now out of Ford (NYSE: F) (Cramer's Take) is that there's really been no progress whatsoever.
How about heating demand? I have seen no switch whatsoever to another fuel because of the rise. Not one bit, or you would see a nat gas rally.
How about power plant demand? I am willing to think that some power plant manufacturers will debate switching, but building a new coal plant is something no one feels comfortable with without new standards. Nothing's happened along these lines, though.
Today's MAD MONEY on CNBC with Jim Cramer was on the road at the University of Texas at Austin. Cramer said there are four best-of-breed stocks at a discount that he would buy. He looked at 207 stocks with a $500 million market cap or more and that have all been overlooked or tossed out by Wall Street.
The first stock he likes is J.C.Penney (NYSE:JCP) as the best retailer in his universe right now out of large cap retail stocks. He thinks the CEO, Mike Goldman, should get the benefit of the doubt. When they said they had to fix the product mix and take a charge, the stock was dropped and is down another 10% hit. With the buyback and with the strong sales he thinks it can have an upside surprise.
His second pick is Transocean Inc. (NYSE:RIG) even after the group was hammered today. Cramer said this has little exposure to the weak areas of Canada and the Gulf of Mexico. They can raise rates highly because of rig demand. They can only buy back stock so fast and the cash is coming in faster than can be spent.
The energy debate rages on as oil and gas futures bounce around with 30% corrections. Which side of the energy debate are you on? Bears say that oil and gas prices are coming back down to earth. Speculators and hedge funds bid them up, global demand is slowing and alternative forms of energy will soon replace the fossil fuels we've come to depend upon. Bulls argue that oil and gas supplies are dwindling at the same time that the emerging market economies (China, India, Brazil and 20 others) need more. As their middle class population builds they too will want cars, air conditioning and electricity and demand will increase. Most oil reserves are in countries with unstable governments and when geopolitical events get ugly, prices tend to skyrocket. 
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