Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
Drilling for Dollars?
02/02/2007 12:00 am EST
Far from throwing in the towel on the oil industry, veteran analyst Keith Fitz-Gerald finds an energy company that is actively participating in three of the five dominant market trends he is currently favoring...
"When we last invested in Statoil (STO NYSE), it produced 83% returns for us. With the energy sector unjustifiably beaten down so far lately, and deepwater drilling companies in increasingly high demand, this third time should be equal, if not more, profitable by the time we're done with it.
"Statoil owns big untapped gas resources and is a primary player when it comes to deepwater exploration, which is where any new oil is likely to be found. Not only is it working in its own interest, but STO is frequently hired by the major oil companies to prospect for and conduct the initial drilling on their wells, too, so the company has multiple revenue streams to ensure future cash flow.
"In addition, STO is diversifying into natural gas and in particular liquefied natural gas (LNG). Last year, it signed a 10-year deal with Enterprise Product Partners for the sale and storage of LNG and also announced a plan to buy Norsk Hydro ASA's energy business for about $28 billion. The combined entity will have oil and gas production of as much as 1.9 million barrels a day in 2007, which put STO in the catbird seat when it comes to future profitability from a variety of diversified resources and operations.
"When the dust settles, Statoil is expected to control 70% of Norway's oil. Norway is the third-largest oil exporter after Saudi Arabia and Russia, not to mention the friendliest of the three as far as the United States is concerned.
"Now let's look at the numbers, which make this an even more intriguing pick. At current valuations, Statoil is a very attractive opportunity. The company sports a price-to-earnings ratio of 8.89, slightly lower than the industry average of 10.2. Statoil's three-year annual growth rate of 36.3% simply outclasses the 6.9% industry average. The dividend is a low 1.90%, but I expect that to rocket upward as oil demand escalates once again in 2007.
"STO is much more than a straight energy or oil play. Because it involves three of the five dominant trends I've defined as unstoppable--oil, the dollar, and China's growth--I prefer to think of it as a building block with a variety of ways to profit.
"Buy STO up to $25.50 and look for $40 in the next 24 months."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...