Mostrous: Energy Triple Play

01/30/2004 12:00 am EST


Yiannis Mostrous

Editor, The Capitalist Times

"There’s no doubt changes taking place around the world  will affect oil and gas prices," says Yiannis Mostrous in Personal Finance "In the next ten years, China will become Asia’s largest oil importer. And India's oil consumption is also expected to soar." Here are some of his favorites.

"When it comes to big integrated energy companies, we particularly like the ones that had successful exploration operations during the late 1990s and are now reinvesting their capital in huge oil field discoveries. One that fits the bill is Total (TOT NYSE). With operations in more than 120 countries, the company is engaged in all aspects of the petroleum industry. The stock trades at a discount to other big oils. We expect 2004 to be the year that Total closes the valuation gap versus the other majors. There's a lot of talk regarding potential divesting its interest in pharmaceutical company Sanofi-Synthelabo. Its stake is worth more than $13 billion—a nice chunk of change to reinvest. Buy up to 96.

"PetroChina (PTR NYSE) is a Chinese oil stock that investors aren’t very bullish on. But management has been restructuring operations and has improved its profitability per barrel of production. The company may be able to get a good piece of the action in the oil and gas reserves of Eastern Siberia and it’s also a frontrunner in the gas business in mainland China. Furthermore, the stock has a small free float of just 10%. Warren Buffett, BP, and some other big institutional players own almost 50% of it. That means for the time being the stock is virtually short-selling free. Buy up to 60.

"Devon Energy (DVN ASE) is the US natural gas play that we like best. It is now the largest non-Big Oil energy producer in North America. Devon has been steadily increasing reserves and output, something that remains the key characteristic to long-term success for oil and gas producers. Plus, the company has used its huge cash flows—up 228% in the quarter to $1 billion—to pay down debt and lay the groundwork for further expansion. Barring an outright crash in energy prices, profit growth should continue in double-digits for the foreseeable future. And if prices remain firm, the stock should have no problem going through the $60 resistance level. Buy up to 60."

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