Peter Lynch of Oil sez: “Opportunity of a Lifetime”

By Travis Johnson, Stock Gumshoe, December 5, 2007

I recently had a reader email me another oil company teaser — not an oil sands company this time, but a regular ‘ol oil firm. The teaser was for Eric Roseman’s Commodity Trend Alert, which I haven’t looked at before, but it was for a company that I did look at a while back.

The last time I looked at this company, it was being teased by Yiannis Mostrous for his Silk Road Investor. The shares were around $75 or so when I wrote it up, and they’re around $85 now after flitting a bit higher in early November, when it seemed like oil prices couldn’t ever go down (and here we are today, still dipping below $90! Woohoo!)

But anyway, I won’t share much of my opinion of the stock here, because my opinion hasn’t changed … but for those playing along at home, here are the clues we’re given for this oil company:

20 billion barrels of reserves

Market cap 1/7th of Exxon Mobil’s

Owns 1.3% of global oil reserves, and 2.1% of current production, and is planning to double production to 4 billion BOE a day by 2016 (that’s “barrels of oil equivalent,” a good amount of it is actually natural gas, though nat. gas is far from “equivalent” in the financial markets these days).

Charles Maxwell, who Roseman calls the “Peter Lynch of oil” agrees that this is the opportunity of a lifetime — like buying oil for $10 a barrel.

So what do we have here? A few moments on “liquefy” in the pensivometer and we can reveal that this company is …

Lukoil (LUKOY for the pink sheet ADRs. If you can trade directly in Russia, I can’t imagine you’ve read this far)

I expect this teaser is also quite old, though probably still circulating — I only got a forwarded snippet from a reader, so I’m not sure. The Charles Maxwell interest in Lukoil has been most recently documented, as far as I can tell, in a Barron’s article from a little over a year ago, I have no idea whether he still likes Lukoil, or likes the current price. He is a very respected analyst at Weeden & Co, and clearly an industry expert, though I don’t know that I’ve ever seen him called the “Peter Lynch of oil” by anyone else.

And actually, if you really want to read up on the commodity super cycle, I discovered belatedly that Roseman appears to have actually made the full text of this special Commodity Trend Alert available online, too, whether by accident or intentionally (which probably also tells you that it might be a bit long in the tooth), so you could always read up on his analysis here if the Gumshoe isn’t good enough for you. Go ahead, I’ll wait. No, I’m not offended, he’s a pretty smart guy … it’s OK, really.

You’re back? Great to see you again! 21 pages — serious stuff, huh?

So what do I think about Lukoil? For me, it’s still a “no thanks” — If I were to take on more political risk with my energy holdings I’d be much more likely to do so in China, where they have a history (OK, a recent history, at least) of propping up their companies and giving them monopolistic protection and first crack at valuable resources, rather than stealing them or privatizing them … or, better yet, in Brazil, where it’s only the too-fast incline of the stock that has kept me from buying back into the shares of Petrobras that I sold, far too soon, a couple years ago. Yet another example of investor psychology doing me in: I’ve been watching Petrobras for quite a while, but the fact that I idiotically sold it at $35 a few years back makes me foolishly reluctant to buy it now at $80 or so.

(If you like Petrobras, by the way, my one word of advice is to look at the A shares, PBRA, before you buy the standard US ADR shares, PBR — essentially the same rights to the same company, in my opinion, better dividend protection, and a lower price — kind of like Chipotle B shares right now)

And, to give Roseman credit, he does specifically say in his report that the real risk for Lukoil is political, especially with Putin continuing his ascendancy and perhaps preparing to be the man behind the throne for decades. I think we just have different levels of tolerance for that particular risk.

For those interested in what I had to say about Lukoil back in September when Yiannis Mostrous was pushing it as being a way to buy “$3.60 oil” (oddly enough, not $10 oil like this teaser — which is nice enough in it’s own right), you can read that writeup here.

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