Now May Not Be The Time To Buy Into Oil Stocks
Wednesday, April 23, 2008PAUL KANGAS: Oil prices rose slightly today adding $0.23 to $118.30 a barrel in New York trading. The move came on fears gasoline supplies are falling ahead of the summer driving season. The Energy Department says gasoline inventories fell by over three million barrels last week while crude supplies rose unexpectedly. As Erika Miller reports, some analysts think rising crude prices will continue to support oil company shares.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: With crude at record levels, it's no wonder oil stocks have been gushing higher. The American Exchange oil index has rallied 16 percent in the past three months, compared to a 3 percent gain in the S&P 500. Despite the lofty levels of many oil industry stocks, some analysts still see good investment
opportunities. Mark Urness of Calyon Securities recommends looking beyond giants like ExxonMobil and Chevron.
MARK URNESS, HEAD OF ENERGY RESEARCH, CALYON SECURITIES: Our top pick is Cameron International, CAM, which is a leading provider of subsidy equipment valves and compressors. They are very much a play on the secular trend of increased drilling in deep water.
MILLER: Calyon Securities has done business with Cameron International over the past year. Part of the reason investors are bullish about the energy sector is the expectation for strong earnings growth this year. Energy is likely to be the top earnings gainer in the first quarter. Wall Street is also forecasting double digit profit growth for the rest of the year. But analysts say those strong earnings depend on a continued rally in energy prices.
URNESS: We think we're in a secular bull market for energy based on very strong demand, but as importantly very limited incremental supplies globally. Places like Russia are seeing production level off. We're seeing Mexico experience declines, et cetera.
MILLER: But others believe crude prices are in a speculative bubble and it would be a mistake to buy most oil stocks now. Among them is Mark Gilman, oil analyst at the Benchmark Company, who thinks crude futures are headed back to $50 a barrel.
MARK GILMAN, OIL AND GAS ANALYST, THE BENCHMARK COMPANY: We still think that there's noticeable risk almost across the entire sector, if in fact our price expectations prove to be valid, namely that prices are unlikely to be sustained at levels above $50.
MILLER: But Gilman does like one company, which does oil exportation and production.
GILMAN: I would have to say our top pick right now is Encana, ticker ECA, which we consider to be a company with talented management and extremely attractive and diversified resource base and a valuation in the context of what's going on right now, it's almost even reasonable.
MILLER: Experts say the biggest risk to investing in oil stocks is a global recession. If economic growth slows sharply, it would likely crimp demand for energy and energy stocks. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
