4 Ways to Profit from Costlier Oil
04/07/2011 4:08 pm EST
The energy sector is not overflowing with bargains, but Marathon Oil and three ETFs look like the best bets, writes Louis Navellier in Blue Chip Growth .
Let me start by saying that there is no shortage of crude oil in the world.
The fact that OPEC stressed they would boost crude production to make up for any shortfalls clearly helped. That was the good news.
The bad news is that Goldman Sachs warned that OPEC's spare capacity likely dropped below 2 million barrels per day, which is not very reassuring when Libya was producing approximately 1.6 million barrels per day before the country's civil war broke out.
We'll have to watch this situation play out to know who is right, but what you really need to focus on in this situation are neighboring Middle East nations, because the next potential dominos in the chain are Bahrain and Saudi Arabia. Saudi Arabia is the world's largest oil producer, and disruptions to oil productions there would be significant to global output and would put firm upward pressure on oil prices.
While it's too early to know if this will happen, it does appear that we are in an environment that will support higher oil prices in the near to medium term. We are capitalizing on this trend through our three crude-oil ETFs, and new stock recommendation.
Marathon Going the Distance
What is keeping us from increasing our exposure to the sector is that there aren't a lot of good oil companies to buy. Between low natural-gas prices and idle drilling rigs, many US oil companies are not as profitable as you might believe.
The real profits right now are being made in the refinery business, where the spread between heavy and light crude allows refiners like Marathon Oil (MRO) to make bigger profits.
The Texas-based company explores for, produces, and distributes oil and gas products throughout several countries, including the US, Canada, Norway, and Libya.
In 2009, Marathon reported reserves of 1.7 billion barrels of oil equivalent, including 600 million barrels of synthetic oil from oil sands. The company's Marathon Petroleum subsidiary operates seven refineries with a total capacity of 1.2 million barrels of crude oil a day.
Marathon Petroleum supplies about 4,600 Marathon gas stations as well as 1,600 Speedway SuperAmerica gas stations in the US. Its international exposure and strong US network are what make this the perfect play right now.
In the latest quarter, the company's sales rose 27% to $20.2 billion. During the same period, Marathon's earnings rose 98% to $709 million, or $0.99 per share, compared with $355 million, or $0.50 per share. The analyst community is now expecting first-quarter sales growth of 25% and earnings growth of 166%.
This stock will put us in an excellent position to profit from the rise in oil prices.
NEXT: Three Energy ETFs to Buy|pagebreak|
Three Energy ETFs to Buy
On to the ETFs. what I really like about this trio of funds is that it gives us exposure to a number of different points of strength that are emerging in the oil sector.
First off, we have the explorer. The iShares Dow Jones US Oil & Gas Exploration Index (IEO) consists of companies that actually go out, find and drill for crude oil and natural gas. The fund's major holdings include big names in the oil industry such as Occidental Petroleum (OXY) and Apache (APA).
Once crude resources are found, they must be refined and turned into gasoline and other products for consumer consumption. The iShares Dow Jones US Energy Fund (IYE) profits from the big companies that manage this process.
Holdings like Halliburton (HAL) and Marathon take crude oil, clean it and help turn it into the everyday products that we use. This fund also contains ExxonMobil (XOM) and Chevron (CVX), which not only provide refining and other services but also sell products directly through their own gas-station chains.
Before any of the companies in the first two ETFs can get anything done, they must rely on the resources provided by the companies in our third oil-related ETF, the iShares Dow Jones US Oil Equipment Index (IEZ). The companies in this ETF supply the machinery and tools necessary to drill for and process oil.
IEZ includes 44 holdings, with major interest in big names such as Schlumberger (SLB) and National Oilwell Varco (NOV). I like this fund because its equipment-related companies don't feel the impact of fluctuating oil prices as directly as companies in our other funds do.