Conrad's Black Gold

09/18/2002 12:00 am EST

Focus:

Roger Conrad

Founder and Chief Editor, Capitalist Times

As an alternative to buying gold as a hedge against uncertainty, some investors and advisors look toward black goldoil. Here, Personal Finance co-editor Roger Conrad highlights two favorite oil companies. Stephen Leeb says, "Big oil companies are the nearest thing to one-decision stocks on the market today."

“More powerful than many of the world’s governments, the new breed of super oil companies offers investors two things in these volatile times: financial power strong enough to weather even the worst crisis and a play on one of the most intractable long-term trends, rising energy prices," says Roger Conrad. "The super oils’ quantum leap in size has magnified all the traditional strengths of big oili.e., the ability to ride out ups and downs in energy priceswhile leaving their ability to cash in on higher energy prices intact.

Almost alone among major corporations now, super oils have the capital and balance sheet strength to invest anywhere, anytime. Historically, the biggest problem with buying big oils was price. Their superior safety credentials meant investors had to pay a premium for them. No more. Super oils today sell at some of their highest dividend yields in recent history. If you don’t own some big oil, now is the time to buy some and lock it away.

BP (BP NYSE) was forged from the mergers between British Petroleum, Amoco, and ARCO. Like other oils, the company’s second quarter 2002 results compare unfavorably on the surface with those of a year ago. Sequentially, however, profits show a solid rebound from the first quarter levels. That was partly on the strength of higher oil and gas prices. But BP also boosted its production by 5% from year-ago levels, reflecting successful reserve development throughout its far-flung empire and made progress cutting costs.

BP has also continued to invest heavily in new reserves, as well as alternative energy. And it has built up its stake in natural gas infrastructure throughout Europe. The 9% year over year boost in the company’s dividend represents a commitment to boosting shareholder value. Buy and lock away BP up to $60.

Chevron-Texaco (CVX NYSE) has amassed a formidable global base of energy assets. The stock has been knocked around by overblown worries about its meager investment in near-bankrupt Dynegy, giving investors a rare opportunity to buy it cheap. Like BP’s, the company’s second quarter earnings were down year-over-year. But after leaving aside one-time items, there was definite improvement on the first quarter.

One source of strength: the company continues to progress rapidly toward its target of $2.2 billion in annual saving by 2003 from the merger between Chevron and Texaco. Importantly, it’s taking advantage of sluggish conditions in the energy patch to build on its major new discoveries in Angola, Nigeria, and China. That will pay off richly as oil and gas supplies stretch evermore thinly in coming years.

Particularly encouraging is the company’s growing orientation toward natural gas, upping production 15% from last year despite lower prices. The stock recently sold as low as the mid-60s on overblown fears about Dynegy, but it’s still a bargain yielding a little below 4%. Sock away CVX up to $85.”

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