“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.

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