Oil Briefs...

07/08/2005 12:00 am EST

Focus:

Here, we add a variety of energy ideas. John Buckingham looks at a driller, Jamie Dlugosch looks at drilling equipment, Mark Skousen eyes a trio of oil favorites, Janet Brown "upgrades" some energy funds, while Bernie Schaeffer offers an oil "strangle."

Buckingham, John"Our Buckingham Portfolio member Transocean (RIG NYSE) announced that it had won a two-year contract to drill offshore Nigeria potentially worth $263 million," notes John Buckingham, editor of The Prudent Speculator. "The contract is to be fulfilled by a special drillship, the Deepwater Discovery, which operates in waters 10,000-feet deep. The ship is one of 32 such 'high specification' rigs. News of the Nigerian deal came a day after the announcement of approval for $985 million worth of contracts for drilling off Brazil. Given the solid deal work and the growing potential that continued higher oil prices will increase demand for offshore drilling, we upped our targets for RIG to fundamental goal of $65 and a long-term goal of $81."

Dlugosch, Jamie"We've seen a fantastic rally in the commodity market over the last 18 months; stocks in the sector have risen in line with the rise in oil prices," says Jamie Dlugosch, editor of The Rational Investor. "At the same time, profits have grown substantially. As a result, prices in the sector remain attractive. It was the same case with homebuilders in 2002. Buyers, in the face of bubble fears, prospered. The same could happen with oil stocks today. I would not suggest that history will definitely repeat itself here, but the odds appear to be in our favor to see fantastic gains in the sector. We will add shares of Maverick Tube (MVK NYSE) to our portfolio. This maker of welded tubular steel products for the energy and industrial market is poised to capitalize on the rich prices of oil. Shares trade for a single-digit earnings multiple and growth prospects are tremendous. We would add shares of MVK at any price below $35, and our target is $70. We feel the upward bias in oil prices should last longer than most expect."

Brown, Janet "The primary goal of our Upgrader system is to buy highly ranked funds, hold them as they outperform their peers and Upgrade when performance falters," notes Janet Brown, whose No-Load FundX has developed one of the top long-term records among newsletters. "Our portfolio is now overweight in the energy sector. Upgrading gains for the past 12 months are more than double the broad market, with the gains concentrated in such areas as energy and natural resources. In our Group 1, which represents speculative funds, over half of the funds that are at the top of our listing (and thus are rated as buys) fall in these sectors: Fidelity Select Energy (FSENX ); Fidelity Select Energy Services (FSESX); Fidelity Select Natural Gas (FSNGX ); Vanguard Energy (VGENX ); Excelsior Energy & Natural Resources (UMESX ), and Icon Energy (ICENX ), as well as two exchange traded funds, the SPDR Energy (XLE  ASE) and the iShares DJ US Energy (IYE ASE)."

Skousen, Mark"I believe oil is in a long-term bull market because of a lack of refineries and failure to discover new supplies," says Mark Skousen, editor of Forecasts & Strategies. "As global demand rises, expect oil prices to reach new highs soon. ExxonMobil (XOM NYSE) remains our favorite big oil company. Exxon is now the largest company in the world in terms of market cap. With its vast resources in all stages of oil production and consumption, it is bound to lead the world in energy. More recently, we recommended Pengrowth Energy (PGH NYSE), a highly profitable Canadian oil & gas trust. It just paid out another monthly dividend of 19 cents, and paid $2.14 last year, for a yield of 9.7%. In its most recent first quarter 2005, cash distributions rose 38% to $128 million, representing 84% payout ratio. Its goal is to reduce the cash payout ratio and increase its cash flow. Let's set a protective stop at $17 a share. US Global Resources Fund (PSPFX ) invests in oil & gas, precious metals, and other commodity companies around the world. The fund is benefiting from the sharp rise in commodity prices. Lipper ranks this fund tops in the global commodity fund arena. With oil & gas and other commodities making a comeback, I expect US Global to perform well in 2005."

Day, Adrian"Our resource companies are all looking good," says Adrian Day . "With demand strong, and refining capacity tight, we suspect price corrections will tend to be shallow and short. So if you are underinvested in energy stocks, don't be too cautious in stepping up to the plate. Devon Energy (DVN NYSE) had a relatively weak first quarter, with production down and received prices less than expected (because of weak differentials for its heavy crude). In addition, one of its 'big potential' plays offshore Nigeria was unsuccessful. But despite the disappointments, there is optimism on these fronts. The company has numerous other big potential projects. Moreover, one its key assets, the Barnett Shale, around Forth Worth, is expanding dramatically. And there was good news on the financial front: Devon sold several non-core assets, as it said it would, raising $2.3 billion, a good price, which it used to redeem some maturing and callable debt, and for share repurchases. Overall, the stock is still inexpensive, with strong potential. Devon continues to be a company with strong producing assets, mostly in the US, with numerous high-potential exploration projects around the world, a strong balance sheet, and top management. We have an almost 100% return from our original investment, but it remains one of our favorites.

Schaeffer, BernieFor sophisticated traders, Bernie Schaeffer offers a "strangle," which is an options play that bets on a relatively significant move-either up or down- in a particular stock. Here, he suggests such a strategy for Marathon Oil (MRO NYSE). He explains, "Oil prices continue to soar, with the August futures contract recently touching a record high. This price surge helped carry oil-related stocks such as MRO to all-time highs. In fact, MRO has rallied steadily along its ten-month moving average since March 2003. The stock is also enjoying the steadfast support of its ascending ten-day trendline. Yet Wall Street remains skeptical of the shares, as ten of the 15 analysts following the firm rate it a "hold" or worse. Any upgrades from this hesitant group could add some more lift to MRO. On the other hand, a short-interest ratio of less than two limits the chance of a short squeeze. And there's ten points of potential downside before support from the ten-month moving average kicks in. For those who fully understand the strategy of a strangle, we would suggest buying the October 55 call (.MROJK) and October 50 put (.MROVJ)."

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