Perfect 10s

07/08/2005 12:00 am EST

Focus:

Jim Jubak

Founder and Editor, JubakPicks.com

In his analysis, Jim Jubak, columnist for CBNC on MSN Money, includes a proprietary ranking system called StockScouter, which rates stocks from 1 to 10 based on various criteria. Here, he looks at a trio of energy-related plays that each earns the top rating of 10.

"The oil-stock rally still has more legs, and the best way to play it is to find firms where sustained high oil prices will make costly new exploration and production pay off big. Oil producers that are developing new supplies in areas where the risk and costs of production might have been daunting in a world of $30 oil could be the big winners in a world where oil stays above $40 a barrel and quite probably above $50.

"Occidental Petroleum (OXY NYSE) was the big winner when Libya reentered the global oil market. Occidental, which had produced oil in the country for decades before sanctions were imposed, won the right to explore and produce oil on five of the 15 blocks let out for bid. Libya has proven resources of 40 billion barrels of oil, which puts it eighth in the list of global oil producers. So it's extremely likely that Occidental's exploration will pay off. Even better, Libya produces light, low-sulfur oil, a precious commodity now because just about all the extra production promised by OPEC will be harder-to-refine heavy oil. After reducing debt by $665 million in 2004, the company will see a $65 million reduction in interest expenses this year. Analysts call for the company to earn $6.96 a share in 2005. That'll turn out to be low by almost $1 a share. Add that surprise to the growing value of the production coming from Libya and you have a recipe for further stock gains. OXY also carries a 1.6% dividend yield.

"Imperial Oil (IMO ASE) is for investors who'd like exposure to the high-risk, high-reward potential of Canada's oil sands, but would like it wrapped up in a conservative financial package. Imperial Oil accounted for almost 20% of Canada's oil from oil sands production in 2004, and the company holds the lease on 460,000 acres of Alberta oil sands. That's a lot of potential oil production, if oil prices stay high, if oil sands processes scale efficiently, and if higher natural gas prices don't wipe out profits. Balancing that risk is one of the oil industry's most productive cash flow machines. In 2004, Imperial produced free cash flow of $1.3 billion, and that's after investing $1.1 billion in property, plants and equipment, after spending $700 million on stock buybacks, and after dishing out $264 million in dividends. The stock yields 1.2%. About 70% of its outstanding shares are owned by ExxonMobil.

"Transocean (RIG NYSE) is my favorite play on oil drilling rather than oil production. With Transocean, investors get a driller leveraged to the deepest of deepwater projects, and that's where the growth is in exploration and production in the Gulf of Mexico these days. With few drillers adding new deepwater rigs, which would take a long time to get to market anyway since they take so long to build, Transocean can look forward to increased day rates well into 2006. In fact, the deepwater rig market is showing shortages in some production areas, such as the North Sea. With deepwater rigs just about booked to capacity, oil production companies have started to push up utilization and day rates for mid-water rigs, too. Wall Street analysts have started to boost their earnings estimates to $1.64 a share for 2005, up from $1.46 90 days ago, and to $3.44 for 2006, up from $2.51. But Wall Street is still underestimating how far oil prices of $50 or better a barrel will push up day rates for drilling rigs and how long that run will last."

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