Don't Slip Playing On Oil

Dec. 20, 2004 — Crude oil prices, which recently corrected from a peak of nearly $56 per barrel in late October, have remained at lofty levels for the past two years, generating sizzling gains for oil and energy-related stocks. The S&P energy sector, which makes up 7.1% of the S&P 500-stock index, has risen about 25.8% this year through December 10, far outperforming other sectors in the S&P 500, which was up 6.5%.

How should a prudent investor participate in this oily abundance? With strong gains this year, many energy stocks appear fully valued, but investors must be selective in looking for attractively valued stocks, said Tina Vital, integrated oil equity analyst at Standard & Poor’s. Vital likes large international integrated oil companies like ChevronTexaco Corp. (CVX), Total (TOT), Exxon Mobil (XOM), and ENI (E). “These companies are diversified, with a nice balance between upstream and downstream businesses,” she said. “They tend to be insulated from both commodity-price and economic risks. Even if global oil demand and oil prices decline next year, these companies should still provide strong earnings growth.”

Vital is also optimistic about oil and gas drilling and services firms. With spare oil production capacity low and energy demand worldwide increasing, Vital expects global energy spending will remain high, in the range of $150 to $200 billion annually over the next 25 years. She further expects spending will shift from the mature basins of North America to lower cost, undeveloped regions in Europe, Africa, the Middle East, and Asia/Pacific.

Within the S&P 500′s energy subsectors, oil and gas refining, marketing, and transportation skyrocketed 55.1% year-to-date through Dec. 10, 2004, while oil and gas exploration and production (E&P) surged 34.7%. However, while global upstream spending has remained high, spending growth was constrained in 2003, as oil companies were wary about a downturn in oil prices and limited worldwide drilling prospects.