...and "Fjording" Oil
01/28/2005 12:00 am EST
Based on his bullish outlook for oil and his contrary bullish stance on the US dollar, Steve Sjuggerud believes the "best of all worlds" would be an oil firm that has "its costs in euros but sells in dollars." Here he makes an intriguing case for a NYSE-listed Norwegian oil play.
"The world’s most hated asset right now is probably the US dollar. From our contrary opinion, the ideal situation is when everyone is bearish, yet the factors that will cause that investment to rise are actually in your favor. And that is what we have with the dollar right now. Everyone hates the US dollar, but in my opinion, the dollar is actually fundamentally more attractive than the euro right this moment In addition to my belief that the dollar will strengthen versus the euro, I also believe that we are still in the early stages of a commodity bull market. Thus, the companies that will do best in the next two years, based on what I believe, are ones that sell commodities like oil in dollars, and that have their costs in euros.
"So who sells oil in dollars, and yet has costs primarily in what amounts to euros? Ah, yes, the Norwegians. And imagine our luck: the big Norwegian oil company, Statoil (STO NYSE) happens to be unbelievably cheap. With a falling euro and rising commodity prices, this company could become one of the most profitable businesses in the world for the next two years. Meanwhile, business is already very good. Statoil has managed to deliver a return on equity in excess of 20% for every year of this decade so far. Chances are excellent the trend will continue in 2005. Third quarter sales were up by over 30% to US$13 billion. That's $13 billion for the quarter, not the year. Profits for the quarter were US$900 million. Multiply that latest quarterly result times four, and you've got an annual income of $3.6 billion. Yet Wall Street values Statoil at $34 billion, or at a p/e of less than ten times its most recent quarterly results.
"Statoil is an excellent opportunity. It's trading at a low p/e ratio that is based on very low expectations from Wall Street. If oil doesn't crash, Statoil should be able to beat Wall Street expectations, again and again. The stock is super cheap, and it's a good business, so our downside is limited. Since expectations both about oil and about the dollar are so low, we could see major surprises here. If oil rises and the euro falls over the next two years, we have an excellent chance of doubling our money here. If neither happens, we'll collect our 3% dividend on Statoil (better than what the bank is paying), and we'll probably still make good money, as the shares move from super cheap to simply in line with the rest of the world's major oil companies. Buy Norway's Statoil and plan on holding for two years, maybe longer."