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Get Four
|  | JULY 6, 2005
Oil Stocks: Plenty of Fuel LeftThat's what Leeb Capital Management's Stephen Leeb believes, since he expects crude prices to head "dramatically higher" in the long termChina's government "gets it" far better than Washington when it comes to energy policy. To Stephen Leeb, president of Leeb Capital Management and author of The Oil Factor, that's the real message of the bid by China National Offshore Oil Co. to take over Unocal (UCL ) -- a company also sought by Chevron (CVX ). "They're doing this because they believe oil prices are heading dramatically higher over the longer term," says Leeb, who agrees with that forecast. And he adds that, like any astute investor, the Chinese are trying to own as much of such a commodity as they can. In his eyes, the only valid issue is whether CNOOC has been financed in an unfair way. WARM WINDS. Leeb still sees many energy stocks as good buys because they're valued as if oil prices are going to come down by as much as 30%, which runs quite contrary to his view (see BW Online, 7/5/05, "Energetic Disagreements on Oil"). Specifically, he names Nabors Industries (NBR ), Suncor Energy (SU ), and the oil producers, as well as what he calls "interesting alternative energy plays," such as Air Products & Chemicals (APD ), FPL Group (FPL ), and Exelon (EXC ). In the area of alternative energy, he feels particularly upbeat about the potential for wind, an area where he thinks the leaders include FPL Group, General Electric (GE ), and Scottish Power (SPI ). Leeb made these and other points in an investing chat presented June 30 by BusinessWeek Online on America Online, in which he responded to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat (AOL subscribers can find a complete transcript at aol.businessweek.com/chat): Q: Steve, what's your forecast now for oil prices and their effect on the stock market -- which is, of course, a big area of expertise for you? A: I believe oil prices' uptrend will remain. It won't be straight up, but by and large the factors that have caused oil to go from $10 a barrel in '98 to more than $50 now are very much in place. Demand for oil is very much in place, given the expanding economies in India and China, whereas the supply is ever more limited. So the only question for me is, short-term dips notwithstanding, how quickly oil prices rise in the forthcoming period -- not whether they'll increase, but how quickly they'll increase. Q: The Federal Reserve just raised interest rates again. How much longer do you think the Fed will stay on this path? A: My guess is not too much longer. Today, as you pointed out, the Fed did raise rates. But this was nullified in effect by a rally in the bond market. The markets are positioned at this point such that the more the Fed raises rates, the greater the risks to the economy -- and the lower long-term bond yields go. So they're relatively powerless, the Fed. It's only a matter of time before they wake up to this. Long-term rates are far more important than short-term rates in their impact on inflation and general economic activity. Q: What are your favorite energy plays? Is it too late to get into the sector? A: No, it's not too late. Hard to believe, but virtually no Wall Street analyst believes that oil prices are going to stay in an uptrend. What this means is that energy stocks are currently valued as if oil prices are going to come down -- and come down a lot (30% or more), over the next three to five years. Plus, if I'm right, the entire energy sector is exceptionally cheap. Beyond the usual suspects such as Nabors Industries, Suncor Energy, and the oil producers are some interesting alternative energy plays. These include Air Products & Chemicals, FPL Group, and Exelon. Q: I would welcome your opinion on EnCana (ECA ) and Transocean (RIG ). A: Both those stocks are in our portfolio, and we like them both very much. EnCana, as with Suncor, has a stake in the Canadian oil sands and has an excellent production future -- i.e., it's going to be increasing in the foreseeable future. Combine that with rising oil prices, and you have a genuine growth stock, which is trading at a very modest multiple of less than 13 times earnings. As for Transocean, it is by a wide margin the most significant and largest deepwater driller for oil, and if there are any additional significant hydrocarbons to be found in the world, they're going to be found in the deepest waters. This highly leveraged driller should see torrid growth for many years. Q: What's your take on the China National Offshore Oil Co. (CNOOC ) takeover bid for Unocal (UCL ) and whether it might be -- or should be -- blocked in Washington? A: I don't think that the bid should be blocked simply because China is trying to buy oil assets. The security argument rings hollow. What China buys from Unocal it won't buy from other sources in the world. So we really don't have an overall issue regarding security. However, if it's determined that CNOOC was financed in an unfair way by the government, that should be considered. If Chevron got a loan from a state and used it to do something unethical, that would also be investigated. In this I feel very strongly that the public, rather than focusing on China's buying U.S. oil assets, should focus on why they're buying these assets, and why they're doing something that will clearly result in repercussions in Washington. My take is that they're doing this because they believe oil prices are heading dramatically higher over the longer term. Like any investor, if they believe any commodity is heading dramatically higher, they want to own as much of it as they possibly can. I think the Chinese government "gets it" as far as energy goes much more clearly than we do. For me, that is the real message of the CNOOC bid. Q: Is now the time to buy Chevron (CVX ), considering the bidding war with China? Or Unocal (UCL )? A: I think Chevron's a fine company to own. We don't recommend it that aggressively because we believe there are better values in the sector. But for anybody wanting income and a stake in rising energy prices, Chevron, with a 3% yield, is certainly a solid holding. As for Unocal, I would not recommend it. It's no longer an energy stock at this point in time -- it's a stock involved in a bidding war. We'd leave it to the U.S. Congress to determine where they're headed. I would add, though, that were Chevron to prevail and buy Unocal, even with a bid 10% higher than CNOOC's, I would regard it as a long-term positive for Chevron.
BW MALL
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