Peak Oil, Invest in oil companies?

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bcc87's picture
bcc87
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Peak Oil, Invest in oil companies?

With peak oil approaching sooner than later, wouldn't it be prudent to invest now in oil companies/stocks/funds prior to demand far exceeding supply?  If so, what companies should be considered?

thanks for any feedback.

 

ewilkerson's picture
ewilkerson
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Re: Peak Oil, Invest in oil companies?

I had the same question.  I started investing in oil and gas 18 months ago along with some alternative energy.  Clean Energy Fuels, started by Boone Pickens, is putting in natural gas refueling stations for truck fleets.  Many truck fleets are converting and they will skyrocket their conversion when peak hits.  There are two things that worry me about oil company shares.  First, the more international they are the more exposure to countries stopping their exports.  On the other hand that gives them a diversified portfolio of reserves.  Second, if the financial markets fall apart, I have no idea what happens.  I'm going about 15% gold and silver, the majority of the rest in International and American independent oil and gas.  Another hedge, when things start to unravel is to buy alcohol and cigarettes.  They are good to trade with.

Phil Williams's picture
Phil Williams
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Re: Peak Oil, Invest in oil companies?

I would be careful in thinking that buying certain stocks will help you to profit from the peak so to speak. I believe it to be much more complicated than that. Below are some of the risks I see in regard to this strategy:

1. We finally succumb to the nasty deflationary pressures, and demand is reduced, and oil prices come down again similar to 2008'. I am personally leaning toward an inflationary outlook, but this is still a possibility.

2. Oil companies do make all the great profits you see coming with higher oil prices, but the OECD governments of the world are terribly starved for revenue that they attach nasty windfall taxes to the oil companies. This I think is likely, because not only would it bring in revenue, it would be popular amongst the public who loves to complain about the "greedy oil companies".

3. Our global economy is so weak that we never get much beyond today's inflation adjusted oil of $100, because everytime we do, we get demand destruction and a recession/ depression.

4. Oil prices do move up well over triple digits, but as oil is depleting, oil companies cannot replace their reserves. A big part of the valuation of an oil company is the ability to replace reserves. With the state run oil companies controlling the good stuff that is left, the independent oil companies continue to shrink. They may get more for what they have, but they will have less of it. This is already happening, just look at all the consolidation and share buy backs in the industry. Exxon Mobil may be private in 10 years.

***Having said all that, I do own some energy equities, however I would not be venturing out into the stock market at all, if I was not already debt free (including my homestead), producing my own energy via solar, and with adequate supplies to last a year without going to the store.

Phil 

bcc87's picture
bcc87
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Re: Peak Oil, Invest in oil companies?

Good comments so far.

Phil, yes individual stocks are risky and would likely stay away. Im interested in some equities. Where do you suggest researching some equities that you mentioned investing ing?

Also, did you convert to solar via company?

 

thanks

ewilkerson's picture
ewilkerson
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Re: Peak Oil, Invest in oil companies?

Phil,

I agree that the governments may put on extra taxes, but theey will still have to leave the companies with some fairly healthy profits.

 

As to your point about demand destruction.  This is true, too, but we could be getting to the point where the depletion (i.e. 4m b/d) of oil fields will outdo any demand destruction.  Even the trillion dollars we spent on opening Iraq's oil is a bust.  The IEA, which is normally conservative, says Iraq will be lucky to add 3million or so on top of their 2.5 million by 2020.  From the dozens of articles I have read, I think oil will stay above $100 this time.  Consumption is rising by at least 1.2 million this year  and next in non OECD countries despite prices which is aleady a new record.  There are not enough new projects coming online to make up the 4 million loss every year. Their governments subsidise prices somewhat, but they, also, drive much smaller vehicles than us.  Demand destruction does not hit them to the degree it does gluttonous Americans.

 

Ernest

ewilkerson's picture
ewilkerson
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Re: Peak Oil, Invest in oil companies?

I just wanted to add to my post above.  What are considered "excess profits" anyway?  What is the cutoff, and how does an excess profits tax pass Constitutional muster?  It doesn't seem to be right under the "equal treatment under the law" sections.  There are some big oil companies based out of this Country.  Gazprom, Total, and Royal Dutch come to mind.  You can, also, hold them for the initial doubling of their prices and sell.  Go back and look at the charts of what oil companies did three years ago.

There are other ways to work it, too.  Railroads will do very well again.  Warren Buffett just bought one.  The natural gas fuel company I mentioned is one.  You can short airlines when oil prices skyrocket.  There are some good solar companies, but there is nothing besides natural gas to replace oil., and there is only enough to help with trucking.  Everything depends on oil in our system in one way or another.  The financial markets on most stocks, except those that benefit from high oil, will plummet.  Bonds will be in great danger.

Just take your time and ask around.  There are alternative energy companies such as the new LED ones, but don't try to explain Peak Oil to your broker.  He will think you are crazy.  I tried.  He said, "You mean civilization as we know it is going to change?"  It's like Pearl Harbor.  It was staring us in the face but we did nothing.

Poet's picture
Poet
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Re: Peak Oil, Invest in oil companies?
ewilkerson wrote:

What are considered "excess profits" anyway? What is the cutoff, and how does an excess profits tax pass Constitutional muster?  It doesn't seem to be right under the "equal treatment under the law" sections.

Congress can talk all they want about "excess profits". But that won't be how they word the laws that they create.

Sure it can be equal treatment under the law if everyone or every company making over a certain amount gets additionally taxed (progressive tax), or everyone who earns income in a particular manner gets taxed differently (capital gains versus wages).

Poet

 

Quadium's picture
Quadium
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Re: Peak Oil, Invest in oil companies?

bcc87 -

I'm a big fan of, and am heavily invested in, the E&P (exploration and production of oil, natural gas, and natural gas liquids) MLPs. These are Master Limited Partnerships or LLCs that are treated as MLPs for tax purposes. I like these because:

1. They pay a juicy distribution that is tax-deferred until you sell. Currently roughly 8%, depending on which one you invest in.

2. Their producing properties are all on-shore in the U.S.

3. They are well hedged, with their production prices largely protected for 3+ years, which protects against the deflationary scenario and/or drops in the prices of oil and gas.

The negatives are:

1. They are partnerships, not stocks. Thus you have to deal with the dreaded K-1 form. Not so bad, once you learn how.

2. Many do business in multiple states, so if you invest significant amounts, you can find you have to submit tax returns in multiple states (as I did)

3. They are not very liquid if you are investing more than 6 figure amounts.

4. The hedges can be a strong negative in a highly inflationary economy, once the prices of oil and gas exceed their hedge contract prices. Some use puts extensively for hedging, which does allow them to benefit from higher prices.

5. Though they are well hedged, they can (and did) crash with the general market, and as the price of oil dropped from $147 to $35 per barrel. During the financial crisis, there was counter-party risk associated with their hedge contracts, as all the big banks were in crisis until they were bailed out by their respective countries. This was probably a major reason for the drop.

They are now mostly making new all-time highs. This is scary to me, but I didn't want to exit. So I hedged by shorting UGY, a financial ETF which is leveraged 2x vs. the Dow Jones Financials Index ($DJUSFV). (Don't go long the 2x short version, SKF, as it has a very significant built-in value leak). As UYG is leveraged 2x, I hedged with a ratio of 2:1 MLPs vs. UYG. My hedge objective was to be market neutral, but with the MLPs consistently outperforming the financials, my portfolio value keeps creeping up (new 2010 high today). Can't complain, I guess.

My favorite MLPs are LINE (Linn Energy) and EVEP (EV Energy). EVEP mainly produces natural gas and NGLs, while LINE is roughly 50% into oil. So LINE's price is doing a little better than EVEP's at present. Others to look at are LGCY and BBEP.

Here's a chart showing the relative performance of the MLPs and UYG in 2010. BBEP really outperformed, however, it started 2010 unusually low as it had temporarily discontinued its distribution.

Hope you find this helpful.

quad

Quadium's picture
Quadium
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Re: Peak Oil, Invest in oil companies?

Ooops. Sorry. I meant UYG, not UGY.

ewilkerson's picture
ewilkerson
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Re: Peak Oil, Invest in oil companies?

The big question in all of our preparations is how fast will it happen?

h2oBoy's picture
h2oBoy
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Re: Peak Oil, Invest in oil companies?

I have invested in numerous commodity stocks and done very well since the 147 pb. I have subscribed to Steven Leebs' services via The Complete Investor ($100/yr) and Real World Investing ($1000/yr). His research seems very thorough and the companies he recommends have fared very well. He has written several books on peak oil and investing.

I highly recommend him.

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