See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal Recent articles: • Energy still the key for income investors, 4/25/2006 • Why interest rates will march higher, 4/21/2006 • 5 stocks ready for inflation's return, 4/19/2006 More... | Jubak's Journal Oil substitutes? Try these 5 stocks Crude prices don't appear to be coming down soon, so oil's alternatives look better and better. As do these companies. By Jim Jubak Anything but oil. Any energy consumer that can is looking for an alternative to oil. Since the oil market is saying that oil prices will go higher as 2006 proceeds, there's plenty of incentive to switch energy sources even if switching takes a while. This economics of energy replacement is the best guide right now to where to put your money in the energy sector. And right now it's yelling, Buy coal stocks. The economics of replacement is the reason why, even though natural gas inventories build every month, natural gas is still priced at better than $7 a million BTUs. The high price of oil has put a floor under natural-gas prices -- and the price of natural-gas stocks -- that continues to encourage overproduction.
It's the reason that oil-sands stocks -- the shares of companies mining and cooking oil from the oil sands of Canada -- have outperformed even the stocks of hot oil producers. Canadian Natural Resources And finally it's the reason why coal stocks are my current energy play of on choice. Yes, they've had a huge run, but the economics of replacement say they stay hot until oil prices and oil-supply security improve. Oil's rough patch The economics of energy replacement starts with oil. On April 21, oil hit $75.17 a barrel for June delivery -- a record level -- before pulling back in the last few days to $72 on a combination of profit taking and President Bush's announcement that the United States will stop buying oil to fill the Strategic Petroleum Reserve. But that's not all you need to know about oil prices. The futures market for oil, which prices oil for future delivery, believes that prices in the future will be even higher than they are today. On April 24, when oil for June delivery was priced at $74.53, oil for December delivery was priced at $76.72 a barrel. The oil market is clearly worried about future disruption of oil supplies. Seems like a reasonable fear. Iran, the No. 2 oil producer in OPEC (the Organization of Petroleum Exporting Countries), is locked in a game of chicken with the U.S. over Iran's nuclear program. (It's not impossible, by the way, that this crisis is being generated by an Iranian regime with deep budget problems in order to maximize the country's oil revenue.) More from MSN Money
Nigeria, the fifth-largest source of oil for the U.S. market, is home to a violent, if politically inchoate, revolt in the oil-rich Niger River delta that has targeted the production facilities of global oil companies. On April 25 Exxon-Mobil And finally, in Venezuela, President Hugo Chavez's plans to nationalize oil projects in the Orinoco River basin threaten to further reduce the country's oil production as some global oil companies decide to pull up stakes and invest elsewhere. Venezuela's current production is already 400,000 barrels a day less than it was before a 2002-2003 oil industry strike against the president and his policies. Contagious fear At $75 a barrel oil has provided support to natural-gas prices -- even though there is no evidence of a natural-gas supply shortage in the United States now and even though natural-gas inventories, now at 1.761 trillion cubic feet, are an astounding 678 billion cubic feet above the average inventory level for the last five years, according to the U.S. Department of Energy. Bernstein Research calculates that even a hotter than normal summer, which would run down natural-gas supplies as utilities turn on their gas powered generators to meet peak air conditioning loads, would still leave U.S. inventory levels at "full" by autumn. But natural-gas prices get support from oil prices by a kind of market contagion. Worries about disruption to oil supplies seep over into the natural-gas market and are fed by stories of Russians cutting off gas supplies to Eastern and Western Europe and by fears of another hurricane-blown supply disruption in the Gulf of Mexico. Speculators who have made money betting on worries in the oil market have made analogous bets in the natural- gas market in hopes of just those sorts of supply disruption. This support from oil has kept natural-gas prices high and encouraged high-cost producers to stay in the market. Cutting into inventories will have to wait until gas companies decide to curtail production. Gas producers won't cut back on expansion plans and reduce production until natural gas prices sink from current levels above $7 to below $5 per million BTUs. At that price point natural gas again becomes competitive with coal at current prices for electricity generation. That would lead to a surge in demand. With cutbacks in production, that would be enough to soak up inventory. Oil at $75 a barrel does more than keep natural gas at $7-$8 per million BTUs. It drives an active oil and natural-gas replacement market in oil sands and, more importantly, coal. The replacements Citigroup estimates that bitumen, the very heavy oil produced from Alberta's oil sands, is trading at the equivalent of $40.20 oil. That's a $35 a barrel discount to the recent price of West Texas Intermediate crude. That's more than enough to enable companies such as Canadian Natural Resources, Suncor But the economics of energy replacement are just as attractive in coal -- and the stocks are nowhere nearly as expensive as the shares of companies with big stakes in Canada's oil sands. Here the trade off is between coal and natural gas, not oil. When the price is right, utilities switch from one to the other to generate electricity. (Only 3% of all U.S. electricity is generated by burning oil. The rest of the carbon fuel slice of the utility pie is divided between coal and gas. About 93% of all coal produced in the U.S. goes into power generation.) And right now the price favors coal. Citigroup estimates that the low-sulfur coal from Wyoming's Powder River Basin sells at current coal and natural gas prices at a 75% discount to the price of natural gas. Coal from either the Central or Northern Appalachian coal fields is selling at a 53% to 54% discount to natural gas. Think utilities haven't noticed? Both Duke Energy But not just for any coal. Over the last decade, the utility industry has been adding scrubbers that remove sulfur from their smokestack emissions. Today 30% to 40% of coal-fired electricity power plants have them. That percentage is expected to increase to 60% over the next five years. That let's electric utilities play yet another round of energy replacement economics by substituting cheaper -- once transportation and energy content is figured in -- high-sulfur coal from Northern Appalachia and the Illinois River Basin for low sulfur coal from Wyoming's Powder River Basin and Central Appalachia. High-sulfur coal from Northern Appalachia sells for $53 a ton (including transportation), according to Friedman, Billings, Ramsey, while Power River Basin coal goes for $55 a ton and Central Appalachian coal sells for $70 a ton. (Midwest and southern utilities buying from nearby coal mines also reduce their dependence for their coal on railroads, which have had a hard time keeping up with demand for coal delivery.) In my regular Wednesday appearance on CNBC's "Morning Call," I recommended these three coal stocks: Consol Energy As always, I've also got two exclusive picks for readers of CNBC.Com on MSN Money. Although natural gas prices haven't fallen low enough to reduce production or to compete with coal in the utility market, gas is still down 25% or so from its Hurricane Katrina highs of 2005. That has produced a very welcome expansion in profit margins for the chemical companies that use natural gas as a feedstock for their products. Specialty-chemical makers, who often operate in smaller or even niche markets without as much competition from the big U.S., European, and increasingly Chinese commodity chemical producers, are getting the biggest bang from the fall in gas prices. Many of these companies were able to push through price increases when natural gas prices soared last year. And now that natural gas prices are down? Remember what they taught you in economics class about high prices being sticky? Turns out that it's true. Customers are still paying the higher prices they accepted when natural gas was more expensive. My two picks in the specialty-chemicals sector are Mac Dermid Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. 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: Consol Energy. He doesn't own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||
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