“Peak Oil Profits: 4 Overlooked Energy Stocks Ready to Run” Motley Fool Income Investor

By Travis Johnson, Stock Gumshoe, July 31, 2008

I’m rerunning this writeup for you, with just one added point here at the top to identify a fourth company that they snuck in since I first saw the ad.

This particular ad is running hot and heavy again from the Motley Fool, popping up all over my mailbox, so I’m sure quite a few of you missed my incisive, witty, and, well, just generally brilliant comments the first time around… this first appeared in early April, I haven’t edited it but there hasn’t been much huge to say about any of these three companies in that time.

However, I can take just a moment to tell you that the order of the companies is mixed up, in case you happen to be reviewing the ad yourself — the deep water oil company is still number one and will be no surprise to you, they snuck in a new number two stock in the ad (there are four now, not three) that is the Chinese utility Huaneng Power (HNP), which is developing a pebble bed nuclear reactor, then went on to number 3, the coal gasification company, and number four, the other oil company that also does deep water production and loooves sludgy oil. So the order is all mixed up, but the text hasn’t changed much … and I can’t add much about Huaneng Power, though I have written about them once or twice in the past and commented about them in a question on this same old post way back when … the other three are all covered below to some degree. And with a bit of bitterness.

So enjoy — the rest of this text is the same as it was when it first appeared in this space, to great fanfare, in early April. I still don’t own any of the three companies, or our new friend Huaneng Power, but I do own shares of CapitalSource, which I mention in passing below….

This teaser came in recently for the Motley Fool’s Income Investor newsletter which, you will be unsurprised to hear, is focused on dividend investing — though they often focus just as much on dividend growth as on current yields, so not all of their picks have super-high yields.

They would love you to take a flier on a subscription to their service, which is currently run by James Early and Andy Cross, and they’d love to charge you $149 a year for the newsletter … which may or may not be worth it. According to Hulbert, this one has underperformed the broader market for the last three years, but more than half of that time was with a different person at the helm. To be fair, it’s also quite likely that, like most income investing services, they have a lot of financial stocks in their portfolio, which would have significantly depressed returns. The last stock we saw from Income Investor was the very aggressively promoted CapitalSource mortgage REIT, which is still in the weeds but has staged a “small recovery over the last couple weeks.

But anyway, whether or not this is a fabulous newsletter I know that many of you are always interested in energy comapanies of various stripes … and “overlooked” energy companies perhaps most of all. So what is the Fool touting here?

They’ve got three of them … we’ll look at ’em in order.

First, they start out by saying that “2 of the most powerful and proven investing secrets of all-time are pointing our small group to a PEAK OIL BONANZA…”

Those two secrets are, broadly speaking, dividends and commodities. The first “secret” is that boring old dividend-paying companies signficiantly outperformed new technologies and new industries over the past fifty years (this is from Jeremy Siegel’s fabulous study, published in book form in The Future For Investors, which I certainly recommend to everyone). The second “secret” appears to be that commodities and energy trading have made some huge fortunes — this teaser mentiones Jim Rogers and Sir John Templeton. I doubt that either of those “secrets” was truly unknown to the great Gumshoe cognoscenti, but perhaps we can still learn something here.

So what are the three overlooked energy stocks that pay nice dividends and are “ready to run?”

“Peak Oil Profit Play #1: Is a leader in deep-water drilling… has 15 years of proven reserves… and rights to explore and develop a region reputed to have billions of barrels of oil…”

Here’s a further excerpt on this one:

“This out-of-the-way oil company is a leader in deep-water drilling… has 15 years of reserves… a plan to supercharge production… and a strong dividend …. Its domestic oil market is expected to grow 4% annually through 2010 — that’s double the world average. And this company has what it takes to not only meet that demand, but expand into the international arena as well. In fact, they’re gunning to hike total fuel production 7.8% annually during roughly that same time period. That’s a rate oil-major peers can’t even come close to.”

And they say you can still get this one cheap … so what is it?

Sound of feverish whirring within the Thinkolator … and what’s that? A little whiff of lime? An aroma of rum? No, no, not rum, that’s a Caipirinha! Well done, Thinkolator, this stock is …

Petrobras (PBR or PBRA)

This is one of many shares that carries a twinge of regret for your friendly neighborhood Gumshoe — I used to own this one, and sold way, way too early (like, nearly 200% ago). I have nothing bad to say about Petrobras, except that as with all Brazilian companies it would be wise to keep an eye on valuation and currency — a fair amount of the move up in the shares has been thanks to the appreciation of the Brazilian currency (the Real) against the dollar, and Petrobras no longer trades at a screaming discount to most other oil majors (though it is still cheaper than most on earnings). That said, the currency appreciated for a reason, this is essentially an oil monopoly with huge new deepwater reserves that they’re still booking and exploring, and they have a home market whose consumption is likely to climb pretty significantly over the coming decades even with their vaunted sugar cane ethanol production.

Petrobras is still effectively controlled by the government, so you have some risk there since governments can change — and even dramatically so, especially in Latin America — but that has lately been more of a positive than a negative influence. Even the one-time firebrand socialist Lula has embraced a working and growing capitalist economy to a large degree, and corporate champions that bring in gazillions of dollars are not to be pushed aside or pulled under further government influence lightly. Brazil has only to look at Venezuela and Mexico to see how much a bureaucracy can screw up an oil company if given half a chance.

Do note that there are two versions of Petrobras that trade on the NYSE, the regular and the preferred A shares. The A shares trade at a discount for no good reason, so I would always go with those (they are the preferred shares, if I remember the terminology correctly, which make up most of the trading volume in Brazil but less of the volume on the NYSE). The dividend does not provide a particularly high yield at the current price and last year’s dividend was a bit lower than other recent years, but the dividend should grow substantially in the coming decade if they are successful at harvesting their deepwater oil and if the price of oil remains so favorable. They do plan to raise production 7.8% by 2011, so production growth does at least appear to be likely.

The minimum dividend is stated as being 5% for the preferred shares, depending on some criteria, and the minimum dividend for the regular shares is 25% of earnings, but preferred share dividends always get a boost if the regular share dividend is higher and the preferred shares get priority in dividend disbursement, so I see no reason to own the common stock when preferred shares are available (there probably is a reason, if you see it feel free to share). If you want to review their dividend policies and other information, Petrobras does have an excellent Investor Relations website in English. Give yourself a little time to read through their dividend policies and ownership structures, it might pay to understand this one, especially if you’ve not ever invested in a Brazilian company before.

This used to be one of two favored government-controlled oil companies that I loved, Statoil being the other, and I sold them both at around the same time. If I look past the bitterness, they both look somewhat attractive still if you consider high oil prices to be a constant, though Petrobras probably has a bit more appeal today since I remain a big believer in Brazilian growth over the long term. I don’t think it’s fair to call these guys cheap, necessarily, but they are probably overlooked by some investors.

But enough blather — I’ve got two other stocks to uncover!

Peak Oil Profit Play #2: America’s perfect alternative… a clean-burning coal-to-liquid technology that packs enough punch to fuel every single truck, car, and diesel engine train in America for the next 811 years…

Here’s some more, from the horse’s mouth:

“It’s about to happen. ONE COMPANY has mastered a way to convert a plentiful North American resource into a clean-burning fuel substitute for gasoline, diesel, even jet engines… Here’s the tale of the tape on this remarkable opportunity: this company is right now selling its breakthrough fuel substitute on the open market… and last year, it made over $2 billion doing just that.

“Are we talking Exxon Mobil, Chevron, or Shell here? Not a chance.

“Sales have grown at an annual rate of 17% over the past ten years. So how come this stock isn’t talked up on CNBC?

“Well… even though you can buy these shares in the U.S., this company is headquartered overseas — far enough away that it’s almost unknown, or at least never talked about, by mainstream U.S. investors.”

This is yet another megacap industrial state-controlled champion from the Southern Hemisphere, but the story is quite different — an energy company from a place that has very little oil and had to come up with something different. Especially since there were plenty of oil producers that even refused to sell the black gold to them for political and humanitarian reasons.

So this little “something different” company must be …

Sasol (SSL)

This is, as you may well know, the big oil and energy company from South Africa, which was essentially told by the government to figure a way to effectively make oil from coal — coal was abundant for the South Africans, but oil was not … and friends were even scarcer, save for the few firms that had a soft spot for pariah states (and their money) and brought in the occasional tanker of crude.

So Sasol worked for years to perfect a German technique for gasifying and liquefying the energy in coal, and they have done it at volumes that no one else approaches, so they’ve also been taking feelers from the other big coal-digging, oil-light countries in the world, especially China and the U.S., to see if they can help.

I won’t editorialize too much, except to just note that coal-to-liquids technology has been around a while but, while the resulting fuel may be considered clean-burning, the process of creating the fuel is very dirty, indeed. Sasol does produce a lot of the energy that’s used din South Africa (and while the company is touted as the “coal to liquids” play it is a diversified energy and petrochemical company), plants are being built and/or explored in other countries with either direct participation from Sasol or licenses to their technology. And they do pay a decent dividend, and some people consider the shares to be cheap. Is coal-to-liquids or coal-to-gas the future for transportation fuel? That’s a question I can’t answer — personally, I’d be happier to see natural gas take a bigger role here given it’s somewhat cleaner profile, but I’m not an expert and I don’t know all the details. Sasol appears, at least, to be large, stable, and reasonably valued … if you’ve got more to share abou the company I hope you’ll do so.

Oh, and by the way, South Africa is one of the few countries whose currency has not really appreciated against the dollar in recent years, so you’re not late to that party, at least (though the party may never get going) … and many South African mining stocks, particularly, have taken a bit of a tumble recently thanks to domestic energy problems, so perhaps there’s some potential there for Sasol … or some potential pitfalls if their coal mining operations are curtailed for lack of electricity, for example.

Have to pick up the pace a bit here … is it too much for the Gumshoe to ask that these newsletter teasers just send us one idea at a time? I’m only one man!

“Peak Oil Profit Play #3: Expertise in extracting hard-to-get-at oil and the potential to shoot up 30% in the not-too-distant future. Not to mention a dividend that’s been growing like a weed!”

So … another little excerpt for you …

“This company is one of the worldwide leaders in deep-water extraction and has a plateful of heavy-oil projects (heavy oil is the gritty gush the world is turning to as older wells are guzzled dry). In other words, this company is perfectly positioned to win big in the future of oil.

“Like the others, you can still get this company’s stock cheap if you act quickly — it’s currently priced at just 8 times earnings — and that’s along with a solid 5.1% dividend per share!

“The world faces an oil “supply crunch” after 2010 because demand will outpace the growth in production from non-OPEC countries, according to the International Energy Agency.

“So why isn’t this company talked up on CNBC? Chatted up beside the water cooler? It’s simple. This company, like the other two I just told you about, flies below Wall Street’s radar. And that’s great news for us because, like I said before, you often find the best companies in the places other investors can’t see into…”

Oh, now come on — this isn’t fair!

Why do I complain, you ask?

Because, as with Petrobras, here we are again bringing up bad memories … this is the other company I mentioned that I used to own, Statoil … though now, after a merger with the other big Norwegian oil firm Norsk Hydro, it’s …

StatoilHydro (STO)

Arg.

OK, I’m not 100% certain on this one — but they do have heavy oil experience in Norwegian waters, and they are certainly skilled deepwater drillers, since most of the pioneering work in this area was done in the extremely inhospitable North Sea. They even have a portion of the promising fields off Brazil, and have been investing around the world in recent decades because of the inevitability of the North Sea’s deceline. They do have a yield that’s about 5% as of the last payment (the dividend is annual, and was about $1.50 last Spring, the current share price is just over $30), and they do trade at a PE of about 8 according to the calculations of Yahoo Finance. So this is probably them.

And to think, a couple times in the past few years I’ve come close to buying Sasol, too. This could have been three for three.

In my opinion, these are all decent plays — they’re all huge companies with long histories, so are far from being the microcap lottery tickets that we often see in these pages, they all pay decent and (generally) growing dividends, which is certainly a comfort in times like these and a wise thing to consider all the time. They are, generally for good, closely related to their home governments, they have interesting “stories” that give a good idea of how growth might continue for them, and they are certainly beneficiaries if we are at “peak oil” and unlikely to see oil prices fall.

I don’t know of significant downside problems for any of the three, other than the fact that they’ve all advanced in price along with the price of oil and may not be screaming buys as they appear based on current earnings. Do keep in mind that as Statoil and Petrobras dig deeper, and further ofshore, costs will escalate, so earnings in five or ten years might be even more leveraged to the price of oil than they are now, at least on the downside — meaning, an oil price that returns to $50 might be a significant problem (for Sasol, too, since they compete with crude oil, at least in a broad sense).

I doubt that oil will return to those levels anytime soon, or fall much at all in the next few years, but I’m sure that if you had asked me two years ago I would have doubted that we’d be well over $100 a barrel by now.

So … there you have it. Three dividend paying megacap companies in the energy space. Love ’em? Hate em? Don’t care? Share!

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8 Comments on "“Peak Oil Profits: 4 Overlooked Energy Stocks Ready to Run” Motley Fool Income Investor"

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David Bond
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David Bond
August 1, 2008 2:32 pm

PBRA shares are not option able.

Stan
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Stan
August 1, 2008 4:59 pm
Petrobras is a great company and has great long-term prospects. I own the regular shares and buy protective puts and sometimes sell a call option. This stock has been recommended by several good investment newsletters and analysts. I feel very strongly about it’s prospects. The chart for it right now would not indicate that it has reversed it’s downtrend or is ready to reverse. However, I think it is getting near good support around $51. I also really like Statoil. I owned it, but recently sold it during the fall in price. I would look to get back in on… Read more »
The Riddler
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The Riddler
August 2, 2008 7:27 pm

Do all here know what shall be the first TILLION DOLLAR COMPANY? Any candidates? :O)

Stan
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Stan
August 3, 2008 10:50 pm

The first trillion dollar company in market cap was Petrochina.

clicclic
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clicclic
August 4, 2008 8:05 am

We’re about to see a lot of manipulation in the price of oil starting very soon and lasting until November 4th. Remember 2006 anyone?

Do some simple TA on these stocks and put in a buy alert on the double bounce. The ‘last hurrah’ for oil-price manipulation is about to occur and that’s when you’ll be able to load up.

JohnM
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CTL
August 4, 2008 3:17 pm

Sasol’s process is so dirty it could never get permitted in the U.S. All the major patents on cleaning up the Fischer-Tropf process are owned by Rentech (RTK). RTK has cut deals with Arch, Peabody and others, beating out Sasol. RTK’s pilot plant opens this year and a company-owned production facility in Natchez opens in 2010-2011.

Gravity Switch
Admin
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August 1, 2008 4:05 pm

True, so there’s one reason to own PBR instead: you wish to sell covered calls.

Petrobras is finally having a decent dip, I might soon be able to stomach looking at it again, it’s a great company that got incredibly popular over the past year and probably got a bit ahead of itself, considering the difficulties and lag time expected in their offshore work … if people finally get scared of Brazil again this might someday return to being cheap, which would be welcome in my book.

farley 5
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farley 5
August 4, 2008 4:13 pm

Broken Record time – The trend is your friend.
http://stockcharts.com/def/servlet/SC.pnf?chart=$WTIC,PLUADANRBO%5BPA%5D%5BD%5D%5BF1!3!1.0!!2!20]&pref=G
Our economy is slowing down, China will stop the oil support once the Olympics are over, the world economy looks like it is slowing down. I want to be short oil until the trend turns up. Spreadtrader can give you the retracement and candlesticks for support and resistance.

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