Opportunity in the Energy Sell-Off
09/08/2008 12:00 am EST
Despite the recent sell-off in energy, Sam Hopkins, editor of Energy and Capital, sees potential in energy.
Q. Sam, in a recent piece on the Russia/Georgia conflict, you cautioned your subscribers to watch their Russian shares closely, but to hold onto their energy shares. Would you expand on that advice?
A. Well, we see a mix of geopolitical risk and opportunity in the flare-up between Russia and Georgia. Ironically, the opportunity for energy investors comes from the risk itself. It’s hard to put your finger on exactly how much the “risk premium” in a barrel of oil is (meaning, what dollar amount is priced in to accommodate for pipeline leaks, theft, war, or other factors that can affect supply). But what we do know is that in Russia’s case, as one of the world’s top producers of hydrocarbons, national oil and gas companies stand to gain when futures prices rise. In this way, Russian energy stocks like Gazprom (OTC: OGZPY) and Rosneft (OTC: RNGZY), both of which trade in London and here on the Pink Sheets, may gain even while the broader Moscow market turns downward.
Q. Many investors may view this conflict as an example of why international markets may be too risky for their money. After all, the Russian stock market - the RTS - has fallen about 20% in the past month. Will you share your thoughts on why investors need to diversify abroad?
A. Investors in Russia are understandably spooked right now, not only by the conflict with Georgia but also the aggressive tone the government has taken this summer towards metal giant Mechel (NYSE: MTL) (Putin issued some veiled threats against the company, causing its shares to plummet—Editor). But educated investors wouldn’t keep their money completely out of Wall Street just because of the subprime disaster, and they shouldn’t pull their money out of international investments because of the threat of war, either. In domestic and global investments, diversification and education are keys to success.
Q. Would you encourage investors to pull their investments from Russia at this time? If not, would you actively encourage them to continue investing in Russia?
A. Some exposure to Russia is appropriate as an energy investor since Russia is in a position of strength, and European markets simply are not in a position to jeopardize Russian energy inflows to NATO states and neighbors. Russian investments are a Hold if you are already in, but accumulation and new positions should be initiated cautiously.
Q. Oil prices have fallen dramatically from their peak. Right now, do you continue to see potential in energy investments?
A. I do think that we are in a sustained energy bull market where investors benefit from tighter supply, the risk premium that grows each time a producer goes to war or even hints at it (i.e. Iran), and the accompanying appetite for renewable options that will get us away from energy dependence on foreign powers.
Q. Would you share a couple of recommendations, please?
A. Take a look at diversified energy exchange traded funds like the Oil Services HOLDRs (Amex: OIH) (large cap, 29.6% three-year return—Editor), and PowerShares WilderHill Clean Energy Portfolio ETF (Amex: PBW) (large cap, 4.6% three-year return—Editor). Both of those hold companies that operate worldwide, letting you straddle the globe and two sides of a lasting upward trend in international energy investments.Subscribe to Energy and Capital here…