Where Best To Invest? - The Energy Sector
Monday, February 06, 2006PAUL KANGAS: The bulls and the bears fought to almost a draw in 2005 as the Dow and the NASDAQ ended the year pretty much where they started. Still, it was a great year for investors who had money in certain sectors such as precious metals and natural resources. So what about this year? Which industries and companies have the best potential to outperform? In our annual look of where best to invest, we ask a team of veteran market monitors for their best bets. Tonight we focus on one of those choices, the energy sector. And joining me now, noted oil and gas analyst Fadel Gheit of Oppenheimer & Company. Fadel, welcome back to NIGHTLY BUSINESS REPORT.
FADEL GHEIT, OIL & GAS ANALYST, OPPENHEIMER & CO.: Thank you.
KANGAS: We continue to see great volatility in oil prices, especially as concerns continue to grow over Iran`s nuclear ambitions. How much more difficult does it make investing in the energy sector, these factors?
GHEIT: It is definitely a negative because people don`t really know where oil prices are heading, up or down and by how much. But longer term, I think people should take advantage of any pullback in oil prices and oil stocks to buy these stocks, because we believe they are very cheap.
KANGAS: What areas of the sector do you think are the most promising this year?
GHEIT: Well, this year -- last year and in the last two years, the smaller independent companies gained the most. The exploration and production companies that -- refining and marketing companies. The large integrated oil companies did not do as well because most investors were making a bet on higher oil prices and that worked for them. This year around, we think we are going to see shift to quality, if you will. We are going to see more shifts to the ExxonMobil, the Conoco Phillips, the Chevron. These are the stocks that have lagged the other sectors of the energy and are likely to do very well.
KANGAS: So in other words, the giants are going to continue to record record profits, is that the way you see it?
GHEIT: Absolutely. Barring a collapse in oil and gas prices, which we do not see, we think oil prices this year will average significantly higher than the average of last year. Last year, oil prices averaged $53, which they are likely to average at least $10 higher this year, which means more record high profits for Exxon, Chevron and Conoco Phillips.
KANGAS: All right. How about in some of the other areas, your top picks.
GHEIT: Well, we like -- of the independent oil and gas companies we like Anadarko. We think it`s undervalued. We think (ph) it has tremendous growth. We also like Pioneer. It`s a company that`s going through restructuring. We think the upside potential in these two stocks are very high.
KANGAS: OK and do you personally own the securities that you`ve been mentioning here?
GHEIT: No, I do not. I own ExxonMobil. I own Chevron and Conoco Phillips. I do not own Pioneer or Anadarko.
KANGAS: So in summary, you`re saying don`t wait for oil prices to come down to invest in the group, is that true?
GHEIT: No. You take advantage of any pullback as a buying opportunity because these stocks are trading at very low multiples, suggesting that oil prices will go to $40 and that we do not see.
KANGAS: They haven`t been great dividend players. Do you see any increases in major dividends?
GHEIT: All these companies are growing their dividend. ExxonMobil just increased its cash difference, so has Chevron and Conoco Phillips. These companies are generating record levels of cash flow. They are buying back their stock at record levels. They are increasing their cash dividend. They don`t have debt really to take down. ExxonMobil has more cash than total debt.
KANGAS: OK, very good. Fadel, I can`t thank you enough for being with us; we appreciate your time.
GHEIT: My pleasure.
KANGAS: My guest, Fadel Gheit, oil and gas analyst at Oppenheimer & Company.
