Prize Parcels in the Oil Patch

08/26/2009 11:30 am EST


Peter Way

Founder and CIO, Peter Way Associates

Peter Way, editor of Block Traders' Oil & Gold Monitor, tabs Hess among the high-percentage plays poised to benefit from costlier crude.

Through all of this year this letter has… debunked the wishful $30-$40 [per oil barrel] thinking of the return-to-cheap-energy crowd. Their kind of misguided agitation has created many opportunities for quick bargain profits in energy stocks.

The market’s action in the past two or three months signals a return to economic reason, and a supply-demand discipline that is encouraging. The disparities between sound industry influences and the financially motivated players continue, but for the time being the financial community has more pressing matters before it than revisiting commodity misadventures.

Note the continuing rising curve of settlement prices [for Nymex crude futures contracts] out through mid-2012. From below $70 to over $80, there is an assertion that energy costs will continue to rise. Many well-understood reasons support the conclusion, and create an opportunistic environment for energy stock investments. So, let’s get specific.

One major has retained strong prospects while its current market price retreated modestly. The combination offers attractive payoff potentials with strong odds and non-scary drawdown chances. As usual, there are no guarantees, but in Hess (NYSE: HES) there is a buy candidate. It has ample data to support a reward/risk tradeoff better than 91% of the over 2,000 stocks, ETFs, ADRs, and indexes that we cover. None of the other big integrated oils is as favorably priced relative to the potentials they present.

Two exploration and production stocks meet our buy recommendation investment hurdle. They are Southwestern Energy (NYSE: SWN) and Ultra Petroleum (NYSE: UPL). SWN now is the stronger choice if there is need for only one, ranking better than 95% of our covered stocks. But UPL is also a good candidate, ranking better than 91% of the others.

[Among] oil services and transportation companies, two stocks have good profit-making appeal. World Fuel Services (NYSE: INT) has pulled back slightly to 44 from its recent rally high of 48. The market-makers see their big fund clients likely to push it over 50, an upside of +14%. Past gains in the three months following the forecast dates when INT had at least as favorable a set of expectations, averaged 23%. On 160 different daily occasions. The second buy candidate in the group is Tenaris (NYSE: TS), a major worldwide supplier of pipe to the oil & gas industry. TS is a good second choice to INT, with a reward-to-risk ranking better than 91% of our research population.

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