Jubak's Journal
Recent articles:
• Buy gourmet stocks at fast-food prices, 9/13/2005
• Do-nothing Fed is dangerously disengaged, 9/9/2005
• 5 water infrastructure bets, 9/7/2005
More...
| | Jubak's Journal
Oil backlash? These 5 drillers will still find profits
After Katrina, politicians are targeting oil companies and demand is softening. But exploration will go on. These drilling and service companies should thrive.
By Jim Jubak
The post-Katrina backlash against high oil and gasoline prices is in full swing.
And no wonder, with the price of gasoline at U.S. stations peaking above $3 a gallon and oil prices breaking above $70 a barrel.
The backlash comes in many varieties -- all flavored with more than a dash of political posturing, of course. Politicians have promised to investigate -- and punish -- price gouging by gas station owners. The U.S. and European Union governments have released more than a million barrels a day of crude from emergency reserves. And France's finance minister has threatened to impose a windfall-profits tax on oil.
This backlash will just speed the ongoing correction in the market for oil and the stocks of oil producers. Oddly enough, though, it's good news for the stocks of oil drilling and service companies. They stand to see increased revenue -- and profits -- as their oil company customers have to increase spending to placate grandstanding politicians.
Conspicuous profits become targets
Already high oil prices have caused a drop, if not in actual demand, at least in forecast demand. The International Energy Agency has cut its oil demand forecast for 2005 by 250,000 barrels a day. And there's some evidence that current demand for real oil has fallen as well. Oil companies have canceled several tankers due to sail from Latin America to the United States. Mexico has cut exports and Venezuela is now sending some of its oil into storage tanks in the Caribbean.
With demand at least temporarily softening, oil prices have tumbled from north of $70 a barrel to south of $64. Even with the drop, oil companies are going to report huge earnings gains for the quarter that closes on Sept 30. Wall Street expects a major company such as Exxon Mobil (XOM, news, msgs) to show a 34% jump in earnings in the third quarter of 2005 from the third quarter of 2004, and XTO Energy (XTO, news, msgs), a smaller independent producer, to grow earnings by 54% in the quarter.
But those kinds of earnings numbers are largely reflected in oil-stock prices, so the oil producer stocks have come down with the price of oil, because investors have concluded, for the near term at least, that oil earnings-growth rates have peaked.
More from MSN Money
The political backlash against oil profits is a reason to sell, too. No matter how you cut it, this backlash -- led by politicians who have done almost nothing to prepare for an energy supply crisis -- will cost oil producers money.
Look at what's going on in France. Total (TOT, news, msgs), the leading French oil company (with 50% of French refining capacity) but one that does business in 130 countries, has been lambasted by French politicians for high profits -- first-half profits climbed by 44%. The company, the politicians have said, should 1) lower the price it charges for oil and gas, 2) increase its investments in renewable and alternative energy, and 3) increase its investment in finding new oil and in refining it. One of the politicians leading the charge, finance minister Thierry Breton, has proposed a windfall tax on oil profits. Total knows it has to take that possibility especially seriously since the finance minister has noted that such a tax would be the easiest way to close the French government's budget deficit.
Spend it or lose it
So how has Total fought back? By spending more on oil exploration, drilling and refining. The company will boost capital spending by $1 billion next year, according to Total CEO Thierry Desmarest. See, the company is saying, we're plowing those profits back into finding and refining more oil. Tax those profits and there will be less oil in the future.
Investors don't have to take sides here or chose between self-interested politicians and equally self-interested oil company executives. It's the end effect that counts: This oil company and others around the world will be increasing spending on oil exploration and production, even above already elevated forecasts.
Spending on exploration and development was already headed upward thanks to higher oil prices -- hence the rally in oil drilling and service stocks this year. For example, OPEC (the Organization of Petroleum Exporting Countries) just reported that its members had drilled 7.5% more wells in 2004 than in 2003 in response to higher oil prices. The number of oil rigs in operation by the 11-member oil cartel climbed 19% in 2004 after dropping by 6% in 2003. The boost in spending on oil exploration and development is the first for OPEC in almost 20 years.
Note that these figures, though just released by OPEC, cover 2004. There's good reason to believe that spending on exploration, drilling, and development has grown at an even faster rate in 2005. On Aug. 2, Wachovia Securities estimated that the 71% of oil exploration and production companies that had reported for the second quarter had increased their capital spending budgets for 2005 by an average 13%.
And that was before Katrina. I think capital spending budgets will rise again in Katrina's wake because of dual pressure from higher prices and the need to head off political criticism. That means more spending for exploration and development at a time when supplies of everything from steel tube to deep-water drilling platforms are extremely tight. Prices have already soared in response to tight supply and heavy demand, but it looks like they'll be spiking some more as 2005 continues.
|
