Appels to Appels

07/08/2005 12:00 am EST


Marvin Appel

President, Signalert Asset Management LLC

Gerald Appel founded Systems & Forecasts, a leading technical and fundamental service, some 32 years ago, and remains as co-editor along with Marvin Appel. Here, they each look at the outlook for oil, the prospects for an energy ETF, and a favorite closed-end energy fund.

"Barring either a global recession, or a prolonged period of quiet in Iraq, the balance between supply and demand will remain a source of support to oil prices and, by extension, to oil stocks," notes Gerald Appel . "Nonetheless, following the recent move above $60, they appear vulnerable to another dip which could represent a long-term buying opportunity. On the assumption that oil prices will not get much higher than $60 per barrel over the near-term, the recommended strategy is to await the next slow buy signal (which we based on a MACD technical indicator), which has occurred roughly every four months since last August, so patience will be required. The Select Energy Sector SPDR (XLE ASE) has tracked the major moves in XOI and would therefore be an appropriate means of obtaining exposure to oil stocks."

Adds Marvin Appel, in a special feature in, "In the near term, it's not clear whether energy stocks will continue to perform. However, the long-term prospects for the energy sector are undoubtedly positive. World oil production is expected to peak around 2030, while demand for oil is projected to grow strongly as living standards in India and China rise. There are energy investments that have the potential to produce income even during periods when the price of oil is stable- energy trusts. These trusts (many of which are Canadian) sell shares and use the proceeds to buy or lease oil land. They make money by extracting and selling oil or natural gas from their land (rather than from exploration). The amount of profit from such activity depends on the terms on which the oil land was acquired, on the extent to which the company has hedged against price fluctuations, and on the current market price.

"Energy trusts are arcane investments. They are small, often illiquid companies you most likely never heard of, whose financial statements are full of subjective data such as the amount of proven vs. probable reserves. The reason why such investments are attractive is that they pay very large dividends, in some cases more than 10% a year. However, some of this dividend represents a return of principal. Our own firm has estimated that the actual investment return potential from certain Canadian energy trusts under current market conditions lies in the area of 7% a year.

"For those of you who are not energy analysts, but would like to participate in a potential long-term energy boom, the Black Rock Global Energy and Resources Fund (BGR NYSE) is a closed-end fund available that can perform due diligence for you. Even better, at current prices you can purchase $1.00 worth of energy assets for only 95 cents. The current dividend is 6.2%, which is a fair return to earn while you wait for oil prices to climb. In addition to energy trusts, this fund holds interests in master limited partnerships (which own pipelines, for example) and other energy-related stocks and bonds. Many of the underlying securities in the fund are illiquid, which makes this a very logical way for individuals to gain exposure. During the past three months the performance of BGR has been similar to that of the oil index."

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