Two Energy Bets

09/29/2006 12:00 am EST

Focus:

Ken Kam

CEO, Marketocracy, Inc.

Ken Kam’s Marketocracy organization, with its legion of experienced investors, often finds hidden or out-of-favor gems where Wall Street fears to tread. Here, he makes a case for two oil companies that are ripe for appreciation…

 

“Valero (VLO NYSE) and Tesoro (TSO NYSE), fell around 16% in August and are particularly good buys right now. Both are in many Energy sector ETFs and index funds so when the price of oil falls, Wall Street sells energy stocks, and Valero and Tesoro get sold off. But falling oil prices do not have the same impact on refiners as on oil producers. Refiners BUY oil so the price of oil is the single largest factor driving a refiner’s cost of production and when it goes down, refiners pay less. The price of refined products (such as gasoline) also drops and demand increases. It took almost 30 years to absorb the excess refining capacity, but now a shortage is pushing this industry’s profit margins to all time highs.

 

“Once the market realizes these profits are here to stay, P/Es should rise and if they just get to market averages we will see a double. The US has not brought a new refinery online since 1976. Getting the permits to build is a multi-year process so the prospects of new refineries coming online in the next couple of years are slim to none.

“One of the most widely held stocks among Marketocracy’s m100 is refiner Giant Industries. Since June, the m100 increased their holdings in GI by 140%. Western Refiners recently bid $1.5 billion for Giant—about a 17% takeover premium. The combined company would be the nation’s 4th largest publicly traded independent oil refiner.

“Australia’s Woodside Petroleum, offered to buy Energy Partners, another m100 holding, for as much as $24 a share, a 25% bump from the previous closing price. Energy Partners was planning to merge with Stone Energy Corp., so Woodside’s offer may be just the first salvo in a potential bidding war for EPL.

“Kinder Morgan, Inc., announced that its management team and private equity firms, would take the company private in a $22 billion leveraged buyout at a 27% premium over the current stock price.

“If Wall Street doesn’t see value in these energy companies, the people with firsthand experience in the industry and with the best track records sure do. We are likely to see more deals where high profits, low PEs, and low interest rates make acquisitions and leveraged buyouts attractive. If you find earnings as comforting as I do and have cash on the sidelines, Valero and Tesoro are good buys right now.”

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