Is It Buying Time for Oil Stocks?

11/13/2008 10:01 am EST

Focus: STOCKS

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer’s Investors’ World, says oil prices won’t remain low and some energy stocks look cheap.

Believe it or not, some of the same “experts” who confidently predicted $200-a-barrel oil by year-end are now forecasting $50-a-barrel oil by year-end. (Crude closed below $60 Wednesday—Editor.)

I am amazed that these “experts” are able to keep their jobs, being so ignorant of the supply/demand curve: High prices beget less demand, more exploration, and eventually higher production. When oil prices rose far enough to start killing demand, the “experts” brushed that aside, claiming that there was no end to demand growth.

Once again, free markets lived up to their reputation. Oil at over $100 a barrel started killing demand. Now, oil could indeed go to $50 a barrel. Markets often overshoot in both directions. Lower oil is a free-market stimulus that will help keep the global economy growing.

It will be a long time before we hear forecasts of $200-a-barrel oil again. But oil prices certainly will rise from their current lows. My sense, from reading all sides of the oil debate, is that a rational price under present circumstances is between $80 and $100 a barrel. Five or ten years from now, the oil price should be higher than that.

My advice is to take advantage of oil’s decline and buy energy stocks. My favorites are BP (NYSE: BP), with a dividend yield near 7%, and Halliburton (NYSE: HAL). Both are way down from their highs, and both will rise sharply as the oil market returns to a more rational, stable level.

BP blew away all forecasts for third-quarter results. In the quarter, BP earned $3.21 a share, up 150% from $1.28 a year earlier. These results exceeded even the most optimistic analysts’ forecast. Thanks to the great third quarter, full-year 2008 earnings are likely to be above $10 a share. Next year, earnings will likely be less but still around $9 a share.

High oil prices clearly helped BP’s profits. Oil prices are now down, and that will dampen future quarterly results, but some parts of BP actually benefit from lower-cost crude. The quarterly dividend has been raised to 84 cents a share ($3.36 a year) for a yield of 6.9%. (The stock closed below $43 Wednesday—Editor.) 

Halliburton reported a third-quarter loss due to settlement of a debt issue. Excluding that loss, operating earnings were 76 cents a share, including four cents per share in hurricane-related costs. Revenues rose 24%. Halliburton had more than $1 billion in quarterly revenues for the first time ever.

This quarter’s lower oil price and financial market turmoil are expected to [hurt] business, particularly in North America. However, the long-term trend is for growth in demand for oil and continued growth for exploration and oil-field services. Halliburton is on track to earn $2.90 per share, for a P/E under seven times. (The stock closed above $17 Wednesday, and yielded a bit less than 2%—Editor.)

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