PKZ: "The One Oil to Own"

05/13/2005 12:00 am EST

Focus:

Eric Roseman

Editor, The Commodity Trend Alert

"Weakness in energy is just a correction in the primary trend," says Eric Roseman, while writing from a visit to the Czech Republic. While he has moved his energy stocks to 'hold' status, he highlights one exception – a favorite oil play that remains a "Best Buy."

"I don't expect oil prices to stay below $50 a barrel for very long. There is a secular multi-year bull market underway for oil, and short-term corrections of this magnitude or greater won't derail the bullish primary trend. I don't care what the bears say about too much speculation and ample crude reserves; they are not reading the hard facts, looking at long-term demand, and more importantly, they fail to realize that most oil companies cannot replace their reserves today. Of all commodities, I like oil and gas the most.

"While we are putting our energy stocks on ‘hold’ for now, one exception is PetroKazakhstan (PKZ NYSE). In my view, this is the best value in the world right now in the energy sector. Very few mid-cap or large-cap oil producers are this profitable, easily replacing their reserves while remaining extremely undervalued relative to their peers or in absolute terms. The stock is down, which is no surprise since crude oil has declined. Plus, political instability in neighboring Kyrgyzstan probably didn't help PetroKazakhstan, either. But I'm not worried about any spillover in Kazakhstan because the economy is booming, spurred by rich oil reserves and an abundance of mineral wealth. Kazakhstan has political stability and has been ruled by the same Soviet-era president since 1991.

"The big picture shows a company loaded with proven and easily replaceable annual reserves, little net debt and the high likelihood of a Chinese oil firm buying PKZ at a rich premium to the current cheap stock price. Plus, PKZ easily ranks as one of the cheapest mid-cap oil stocks in the world, trading at just 6.1 times trailing earnings. The company has a solid balance sheet as well. When you buy this firm, you're also getting one of the best entrepreneurs in the oil patch - Bernard Isautier. Meanwhile, the company is nearing completion of a 1,000- kilometer oil pipeline between the land-locked state of Kazakhstan and China's hungry oil market. I'm not sure if a Chinese or Canadian oil giant will bid for PKZ, but in my eyes some sort of buyout is on the way, and at a much higher price. This is a great stock to own now. If you only buy one oil stock, make it PKZ."

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