Streetwise
Lauren Rudd
Sunday, June 22,
2008
There Is Money To Be Made In Oil
It is amazing what a company’s shareholders will put up with.
Step back to January 15, 2006, to the 2006 North American International Auto
Show. General Motors unveils a new Chevrolet Camaro concept muscle car. GM had
spent seven months developing the 400-horsepower vehicle in an effort to
challenge Ford’s Mustang.
One small problem...the country’s attention was riveted on oil
and gasoline prices and fuel efficient hybrids. Meanwhile, GM was spending
precious research dollars on 400 horsepower gas guzzlers. We will not even
discuss the Hummer, a business decision that escapes all rational thinking.
Here we are today and Rick Wagoner, chief executive of GM,
announces that GM is closing four plants that make trucks and SUVs because of
lagging demand. That announcement came on the heels of GM’s announced $39
billion loss in 2007, a year when GM’s share price fell 19 percent. And Wagoner?
His pay rose 64 percent to $15.7 million.
Meanwhile, if you are expecting the energy situation to
return to “normal” at some distant point in time, you are fooling yourself.
Expensive energy is here to stay. The only remarkable thing is that it took so
long to occur. Drilling protected offshore sites and the Arctic National
Wildlife Refuge will not solve the problem. It would take 7 to 10 years for new
deep ocean wells to come online. Furthermore, the Energy Information
Administration estimates that drilling in the ANWR would trim 1 to 3.5 cents off
a gallon of gas...by 2027.
Keep in mind that the United States has just 3 percent of all
the world's oil reserves. What is even worse is that Alaskan oil is sold abroad.
Alternative and renewable energy sources along with reduced demand are the only
sensible routes away from foreign bondage. Higher energy prices are forcing us
in that direction. Gasoline demand fell 1.4 percent in May, as measured by
deliveries, sending year-to-date demand for gasoline down by 1 percent; a
decline of that nature has not occurred since 1991.
The political rhetoric on the subject of oil prices is mostly
hot air. If you want the price of crude to come down, we need a stronger dollar.
Oil is priced in dollars. A stronger dollar means more oil for fewer dollars.
Yes, a stronger dollar also means that exports will decrease, imports will
likely increase and corporate profits abroad will decline. Too bad.
Wall Street and politicians have a lot in common. Both will
tell you want you want to hear. For a true picture, you have to do your own
research. Nonetheless, there is considerable money to be made by investing in
oil related stocks. One of my favorites, and a company I wrote about a year ago,
is Schlumberger.
Schlumberger assists in the location and development of oil
and gas reserves. Not only is it the largest among its ilk, it's also the most
geographically diverse and technologically proficient.
Furthermore, current drilling projects are based on
profitability models using natural gas and oil prices that are far below current
levels. That means there is considerable downside protection accorded investors.
When I wrote about the company a year ago, it was trading at
$85 per share, as compared to today’s price of $105.
On April 18, Schlumberger reported first-quarter revenues of $6.29
billion as compared to $5.46 billion in the first quarter of 2007.
Earnings-per-share from continuing operations was $1.06 per share, as compared
to $0.96 per share a year ago.
The intrinsic value of the shares using a discounted earnings
model is $127 per share, assuming a 15.85 percent earnings growth rate and a 15
percent discount rate. A free cash flow to the firm model yields an intrinsic
value of $144 per share. My earnings estimate for 2008 is $5.90, with a 12-month
price target of $124 per share, for an annual gain of 18 percent. The current
dividend yield is 0.84 percent.
