Four Ways to Play Energy

09/19/2003 12:00 am EST

Focus:

Several leading financial authorities offer a variety of ways to invest in the energy sector. Martin Weiss suggests a pair of domestic energy stocks. Richard Driehaus suggests two firms that explore in China. Jamie Dlugosch goes with an oil refiner. And John Buckingham picks an oil tanker operator. (For more information on any of the advisors below, simply click on their photos.)

Weiss, MartinDespite his expectations for deflation, a bursting of the housing bubble and a bear market in equities, Martin Weiss, editor of Safe Money Report, still finds select opportunities. Last year, he recommended an oil trust which has since returned 68%. Now, he says, "I've just completed a search of all publicly-traded energy-related investments and have come up with two other opportunities that I believe have the potential to do equally well."  Weiss explains, "Kinder Morgan (KMP NYSE) operates pipeline systems. In the 12 months ending June 2003, revenues were up 53% and net income rose 17%. KMP pays a health quarterly dividend yield of 6.4%. Buy now, but don't pay more than $42. Pogo Producing (PPP NYSE) explores and produces oil and gas. Profits are up 179% since last June, and its share price is on a roll as well. Buy now, but don't pay more than $47."

Simonoff, EvanEvan Simonoff, editor-in-chief of Financial Advisor, interviewed Richard Driehaus, one of the few growth managers to bail out of tech stocks just before the bubble burst in March 2000.  Simonoff asks, "Some say that China is at the same economic point that Japan was in 1960 when Japan's appetite for oil increased four or five times. If China does likewise, could that send demand for energy through the roof?" Driehaus responds, "That's a good point, and it's why we have a big position in China Petroleum (SNP NYSE). The fear of a shortage or tightening in physical supplies of basic materials in the Far East is a real one. My feeling is that those companies that have energy placed in the Far East will be good long-term buys, and the ones that will be most interesting are those that are doing exploration and development over there. One firm we find interesting is Ultra Petroleum (UPL  ASE). It explores for energy in China, as well as the western US."

Dlugosch, James"Tesoro Petroleum (TSO NYSE) is one of our favorite undervalued selections," says Jamie Dlugosch, editor of The Rational Investor. "Even after impressive gains in 2003, the stock is still undervalued and well below our target price of $20 per share. The company is expected to earn $1.23 in 2003 and $1.59 in 2004. At current levels, that gives the stock  a P/E multiple of 7 and 5, respectively, which are much too low for an oil refiner that has rebounded nicely from the operating difficulties of the late millennium. We would be comfortable buying up to $10 per share. Given that price stability has returned to the oil market, demand is increasing and world economies are improving, Tesoro is positioned to deliver superior returns."

Buckingham, John"We continue to think that industry conditions in international crude oil transportation services remain quite favorable," notes John Buckingham, editor of The Prudent Speculator. OMI Corp. (OMM NYSE) is docked on our recommended list. OMI expects tanker rates for the balance of 2003 to be buoyed by seasonally higher world oil demand and unusually low commercial oil inventories in the U.S. and Western Europe. While we concede that earnings in the sector have been notoriously volatile and that tankers are a potential target for terrorists, we think that valuation of the stocks in the sector are attractive, trading near book value and for single-digit P/E ratios. We would buy the stock (with the symbol OMM despite the name OMI) up to $7.47 as it trades for just 8.1 times trailing 12-month earnings."

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