Jubak's Journal
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Is there fraud in the house of Saud?
(Page 2) of 2
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Global peak in 2008?
Now other geologists and geophysicists updating his work find that the model shows global oil production hitting a peak -- now called Hubbert's peak -- around 2008. (For more on this model and the evidence for a peak in global production as well as links to sites giving you a packing list for surviving the coming collapse of our oil-based civilization, check out ASOP's site.
You'll notice that while U.S. oil production may have peaked in 1970, the U.S. oil industry is still pumping oil today. Hubbert's work predicted a quick and steep run to the peak and then, not a quick collapse in production, but a very gradual but inexorable decline. Even after Hubbert's peak, new oil fields will be discovered and new technology will extract more oil. But the rate of new production will be insufficient to cover the depletion of existing reserves, and production will slide. The downward slope may indeed be so gentle that no one notices it at the time. The age of oil, according to Hubbert, is more likely to end with a whimper than a bang.
Higher oil prices as production gradually declines are one factor that makes the slope so gentle. At $50 a barrel, it pays to put more expensive technology to work extracting oil from fields that were regarded as played out. That makes oil companies such as Apache (APA, news, msgs) that specialize in "exhausted" fields a good buy now if you believe Hubbert's peak is near.
Higher oil prices, of course, also encourage consumers to turn to alternative sources of energy, such as coal or wind, and work to increase the supply of those alternatives as companies find investing in non-oil energy projects more attractive. That's why I've recommended Peabody Energy (BTU, news, msgs), a coal company recently.
After all of this I'd like to be able to tell you what the price of oil will be in 2009 or how many years the world has to get ready for the descent from Hubbert's peak, but I can't. That's because the art of predicting the growth in global oil demand has been completely outstripped by events. Oh, it's not that there aren't lots and lots of projections. It's just that all of them are based on oil prices that have been left in the dust by the current market. And that's important because at some point for some consumers higher oil prices cut into consumption. For example, the top price that the Energy Information Agency uses in projecting the global demand for oil out to 2025 is $37 a barrel. All we know about economics says that demand is likely to be lower if oil sells for $50 a barrel than for $37. But not only don't we know how much lower, we haven't even put the higher price into the models yet.
From the investor's point of view
So where does that leave you as an investor? Caught between Saudi optimism and peak oil pessimism, I'm inclined toward the darker end of the scale. I know the Saudi's have motivation for painting an optimistic picture, since any forecast of steady or lower oil prices in the future due to extra capacity inhibits others from developing some source of non-oil energy. The longer the world believes that the Saudis can provide the oil it needs, the longer the Saudis remain at the center of the world's geopolitical stage. And we do have enough anecdotal evidence -- reserves in Oman, for example, are showing damage from the use of water to extract oil -- to believe that Saudi depletion estimates might be on the low side.
But if we take Hubbert's peak seriously as a model, as investors we should also realize that the oil-based global economy still has decades of life and that, on average, rising oil prices, and, until extraction costs get really out of hand, rising oil company profits, will be with us for a while. Investors don't have to make a killing on oil stocks this month or even this year.
That's not bad to remember at a time like this when oil shares are taking their lumps.
New developments on past columns
7 reasons the bears might be right
I took a lot of ribbing, some of it good-natured, in my mailbox when, two days after writing that I thought stocks had another two weeks of declines ahead of them, the Dow Jones Industrial Average ($INDU) rallied for a 206-point gain. In my column I wrote "My best guess is that we're not there yet. I think we'll need at least another week with a failed rally -- to suck in the last optimists -- and then another stretch of a few down days -- to spit them out again -- before this market decline is ready to call it quits."
Well, we've had our rally, the optimists came out of the woodwork at least long enough to e-mail me, and now the markets have broken down again. After almost eight years of writing this column, I know that it's impossible to pick an exact bottom except by luck, so I can't say with certainty that we're there yet. But with the first quarter GDP numbers on the economy in (on the morning of April 28) and the Federal Reserve's Open Market Committee set to announce a probable interest rate hike on Tuesday, May 3, I'd say the odds shift in the second half of next week away from further declines and toward at least a moderate seasonal rally. If I'm wrong, please don't hesitate to say "I told you so."
5 ways to play oil's renewed strength
Don't fixate on the short-term earnings game here. Instead, keep your eye on the long-term. Yes, XTO Energy (XTO, news, msgs) did miss Wall Street earnings estimates by 2 cents a share when the company reported first-quarter earnings of 55 cents a share on April 20. The culprit? Rising production costs. (I don't see that as a problem because the increase was largely a result of the company spending more money to get oil out of the ground faster in order to take advantage of high oil prices.) But here are the numbers you should pay attention to: production soared by 34% from the first quarter of 2004 and operating cash flow rose 55%. And going forward the company increased its guidance for production growth in 2005 to 24% to 26% from the previous projection of 23% to 25% growth. The company sold its oil for an average price of $41.78 a barrel in the first quarter and projects a realized price for 2005 of $3 to $4 a barrel below a projected average NYMEX oil price of $45 a barrel. The stock split 4/3 on March 16. As of April 29, I'm raising my target price to $36 a share by December 2005 from my earlier split-adjusted target of $33 a share.
3 ways to capture the September effect
Apparently even an inflation hedge can get hit by inflation. On April 27, Newmont Mining (NEM, news, msgs) reported a drop in first-quarter earnings to 19 cents a share from 20 cents a share in the first quarter of 2004. Wall Street had been looking for earnings of 30 cents a share. Higher fuel prices, higher costs for underground contract services and higher maintenance charges all took a bite out of earnings. Add in production problems at the company's mines in Indonesia and Uzbekistan and the reasons for the miss become clear. In the quarter the company sold 1.994 million ounces of gold at an average realized price of $425 an ounce. That was an increase from the $412 an ounce realized in the first quarter of 2004. The company didn't change its guidance for total equity gold sales of 6.6 million to 6.8 million ounces for 2005. So the major unknown going forward is the price of gold. The price of gold for spot delivery was hovering near $430 an ounce at the end of March. That's still down from $458 at the December high, but up from $425 in early April. I think this is where investors who believe that inflation and a weaker dollar will roil financial markets add to their gold hedges for long-term protection. The nearer term story is harder to figure, but as of April 29, I'm setting a target price of $46 a share by December 2005, down from my previous target of $55, for Newmont Mining shares. (Full disclosure: I own shares of Newmont Mining.)
Time is ripe for these 7 biotechs
I don't expect this news to move the price of Cell Genesys (CEGE, news, msgs) shares, but it is good news for investors in the biotech company, nonetheless. Here's the news as reported by the Medical Technology Stock Letter: "The company has developed a gene expression technology which uses their adeno-associated viral or other viral-based genetic engineering that could give them the capacity to produce full-length monoclonal antibodies on a commercial scale from just a single cell line. In addition, they believe that they will be able to produce the cell lines for commercial production of the antibodies in a matter of just weeks, as opposed to the months that it takes for the production of monoclonal antibody cell lines by currently used methods."
Cell Genesys intends to try to generate revenue from this technology by licensing it to other biotechnology companies. Any cash stream from those licenses would reduce the cash the company needs to raise in the public markets and that would in turn reduce any dilution suffered by current shareholders as the company continues to burn cash to fund the development of its cancer vaccines. The research on this technology was published in the April 17 issue of Nature Biotechnology. (Full disclosure: I own shares of Cell Genesys.)
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Apache, Cell Genesys and Newmont Mining. He does not own short positions in any stock mentioned in this column.
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