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10 stocks that win with $60 oil
The price isn't just a number. It's shorthand for permanently high costs and soaring global demand. That means big opportunities for companies that can develop new resources efficiently.
By Jim Jubak
Sixty-dollar-a-barrel oil. It's different this time.
And investing as if this was just another temporary hike in the price of a barrel of oil isnt going to cut it over the next decade. In this column, Im going to give you my take on how $60 oil has changed the game for investors. And 10 stock picks for winning this new game.
Its not so obvious in the short run that the game has changed. In the short run, that $60 figure is just a price. But -- at least in the short run -- it's a price that moves the financial markets and the economy. When daily oil prices break below $60, stocks rally. And when crude moves strongly above $60 a barrel, stocks retreat. Check out the action on March 2 to see what I mean: A jump in the April crude-oil futures contract in New York to $63.36 that day helped the Dow Jones Industrial Average ($INDU) to a 28-point stumble.
Investors and traders are familiar with this kind of pattern and the factors -- such as seasonal fluctuations in inventory and market reaction to news -- that produce these moves. In the short run, although the price swings may be more extreme, $60-a-barrel oil is business as usual.
In the long run, though, $60 oil is shorthand for a set of changes in the global economy. I spelled out some of those changes in my March 3 column, Oil producers reach for more power. And Ive written about others -- ranging from peak oil to the rising cost of finding and producing oil -- in previous columns.
What $60 means
To sum up, briefly:- $60 oil is shorthand for an increase in the already substantial economic clout of oil-producing countries and a further decline in the independence of the global oil companies.
- Its shorthand for rising costs of production, as oil-producing countries charge more for access to their oil and as it gets more and more expensive to produce oil from aging or unconventional fields.
- Its shorthand for the growing importance of technology in the energy sector, as oil producers of all stripes struggle to wring oil out of old or damaged reservoirs or out of difficult-to-reach reserves -- and as every producer tries to control costs.
- Its shorthand for increasing demand from China and India that will keep supply too close to demand for comfort. It will thus magnify every minor geopolitical ripple, such as a regional war in Nigeria, into a market-moving event.
- Its shorthand for the increasing political uncertainty of supply, as the world becomes increasingly dependent on oil and gas from countries such as Russia, Iran, Nigeria, Venezuela and Saudi Arabia that are each ruled by regimes that are themselves dependent on oil-and-gas revenue to maintain their power.
And most of all, $60 oil is shorthand for permanently high energy prices. Oh, maybe not at the $60 level if the worlds economy slips into recession or if the worlds consuming countries take strong action to reduce their demand for oil and gas (Hey, dont laugh. It is theoretically possible.) But, nonetheless, crude oil permanently priced above the $45-a-barrel point makes so many new energy sources and energy technologies viable investments.
Related news and commentary on MSN Money
10 for $60
Let me translate three parts of that $60-a-barrel shorthand into longhand and give you a few specific stock picks for each part of this new global economy.
Lower royalties and greater political stability give a big edge to North American energy producers. At a time when energy-producing countries such as Venezuela are raising the royalties that oil producers must pay on each barrel they pump to 30%, the United States is headed in the other direction. Thanks to legislation passed during the Clinton administration and never revised, oil companies pumping oil and gas from federal lands will get about $7 billion in royalty relief between now and 2011. The problem, first exposed by The New York Times, is the result of incentives designed to encourage expensive deep-sea drilling in the Gulf of Mexico when oil was selling for less than $20 a barrel. But the royalty relief, which covers all drilling leases from 1996 through 2000, is still in place, even though oil is selling for more than $60 a barrel. Add in the relative predictability of U.S. and Canadian law -- nobody is about to seize domestic oil projects belonging to ExxonMobil (XOM, news, msgs) -- and domestic producers have a big edge on costs and reliability of production. This hasnt been lost on oil and gas companies: EnCana (ECA, news, msgs), the Canadian-based oil-and-gas producer, has been busy selling off foreign reserves in order to invest in North American projects, for example. Big winners from this North American edge include EnCana, Canadian oil sands producers such as Canadian Natural Resources (CNQ, news, msgs), and companies such as EOG Resources (EOG, news, msgs) that are tapping into the huge Barnett Shale formation in north central Texas.
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