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Jubak's Journal
Recent articles:
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| | Jubak's Journal
Texas tea looks less like black gold
It would seem an easy time to make money in oil stocks with war fears pushing up oil prices. But investors are finding that it's not a simple equation.
By Jim Jubak
A year ago, the price of a barrel of West Texas crude oil on the futures market was just $20.38. By last week, the price of a barrel had soared to $33.53, a 65% increase.
Over the same year, however, a share of Chevron Texaco (CVX, news, msgs) dropped 23%. Royal Dutch Petroleum (RD, news, msgs) stumbled 9%. Exxon Mobil (XOM, news, msgs) fell 9%. BP (BP, news, msgs) dipped 6%.
The trend wasnt limited to the major integrated oil companies, either. Among the companies that specialize in refining Ashland (ASH, news, msgs) tumbled 36% and Amerada Hess (AHC, news, msgs) was down 10%.
And oil stocks haven't performed a whole lot better as war fears have increased in recent months. Amerada Hess and Ashland have dropped a huge 23% and 18%, respectively, over the last six months. BP is down 9% and Chevron Texaco down 2%. Only Exxon Mobil, up 8%, and Royal Dutch, up 2%, have posted gains among the majors.
Why have so many oil stocks failed to deliver the gains that investors hoped would make up for some of the punishment suffered by the rest of the stock market?
The list
There are three reasons.
First, it never pays to forget that the price of a commodity and the profits made by companies that use that commodity arent always tightly linked.
In this case, because the specialist refiners dont produce any oil themselves but instead buy it on the open market, any spike in oil prices drives up the cost of their basic raw material. That's why this part of the sector has taken such big losses this year.
Integrated oil companies like Exxon Mobil and BP pump their own oil, thus benefiting from rising oil prices. But they also buy oil to refine, so these companies can face margin pressure if oil prices rise faster than they can be passed along to consumers. (And if crude oil prices fall but the prices of refined petroleum products stick at high levels for a while, these companies will see profits increase.)
Its no accident that only companies such as Apache (APA, news, msgs), Burlington Resources (BR, news, msgs), and St. Mary Land and Exploration (SM, news, msgs) that dont refine but just pump have seen their share prices rise substantially in the last six months.
The big fear
Second, war in Iraq could mean either higher or lower oil prices depending on how the fighting goes. Investors who are using oil stocks to hedge the risk of war are still worried about oil prices dropping quickly if the war is over in a flash.
In this quick war scenario, oil prices would move well above $30 a barrel before the war but would quickly drop to something like $22 to $24 a barrel, the lower end of the target range set by OPEC, the Organization of Petroleum Exporting Countries.
Playing this out, oil prices have nowhere to go but down from current levels. And oil stocks should be priced not on projected earnings at $33 a barrel but on earnings at $22 a barrel. Using those numbers, Exxon Mobil and Royal Dutch are still expensive. Only Chevron Texaco has dropped enough to make it interesting.
And third, if oil prices stay at current levels for any extended period, theyll take a big bite out of global economic growth, and that will send energy prices back down as demand collapses. Again, any energy stock priced for $33 a barrel oil would be too expensive. (For more, see "Gold glitters in '03, but crude may not.")
Standing alone
One part of the oil sector seems immune to these forces, and it's the only part of the sector that shows solid gains over the last year. The oil companies that produce as much natural gas as oil and produce much of their natural gas in North America have been able to deliver what investors hoped for from the oil sector. That's because the level of oil production in Iraq or Saudi Arabia is less important to natural gas prices in the United States than the low level of U.S. natural-gas inventories and the colder-than-normal winter weather.
But remember that, war or no war, natural-gas stocks historically peak in April and retreat with the coming of warmer weather in the United States.
These stocks too are still subject to the facts of supply and demand in the energy markets.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Apache. He does not own short positions in any stock mentioned in this column.
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