Investing in Oil and Gas

ByABC News
September 12, 2000, 9:36 AM

Sept. 12 -- What significant new trend could make you serious money? The common answers today: broadband or wireless. But let me suggest another oil and gas exploration and production companies.

Dont laugh. Some of these stocks have moremomentum than many tech names; thesecompanies should all crush Wall Street earningsestimates. Most importantly, they trade as if oilprices will soon return to the $18 to $22 per-barrelrange and natural gas prices return to the $2.50per-million-cubic-feet range. (Today, oil traded in the$35 range and natural gas in the $5 million cubicfeet range.)

UBS Warburg analyst Christopher Eades makesthe bull case pretty well in a recent report: Despiteoil prices at close to peacetime highs and naturalgas prices at record highs, the E&P [exploration andproduction] companies continue to discount anoverly bearish environment. The roots of investorpessimism are easy to pinpoint. A basket of E&Pstocks bought at year-end 1988 and held throughyear-end 1999 would have realized a net return ofzero Thus, most seasoned E&P investors havebecome accustomed to riding the group up and thenselling in anticipation of a coming correction.

Boosting Price Forecasts

There are reasons to think that this time the recentpast will not be a prologue. Oil and natural gassupplies remain extremely tight, and OPECimpressed no one with its decision to increase dailyproduction by 800,000 barrels. Worldwide energydemand continues to grow, especially in Asia.

And from the Wall Street angle, analysts are scurrying toboost price forecasts for oil and gas. And I would betthat most investors are underweighted in the area meaning they own fewer oil and gas names than thebenchmarks they use to measure their relativeperformance. All that bodes well for the E&P group.

Now, Im not an oil expert, but it seems to me thatthe Law of Large Numbers has got to come into playpretty soon. Heres what I mean. Oil consumption iscurrently running about 75 to 80 million barrels perday. OPECs total production is about 25 millionbarrels per day. Lets assume demand grows at 2 percenta year. Doesnt seem like much, but 2 percent growth on abase of 75 million barrels per day means that inabout 10 years, new demand will consume justabout all of OPECs production.