Friday, August 15, 2008

the market's view on oil

The general rule when buying and selling energy and commodity names is the reverse to other stocks; "buy when P/E ratios are high and sell when P/E ratios are low". This strategy would work like a charm right now, if and only if, the energy and commodity bull market is coming to a close. That is, the cycle is turning and these things will come crashing down without touching the sides. You want to be selling when earnings have grown so high that when they're compared with the stock price they produce a very low P/E ratio.

Keeping with the theme of 'is oil dropping to $60/barrel?' Here are some of the Price to Earnings (P/E) ratios and yields that the market is currently offering for these names:

Petro Canada (PCA) - P/E= 5.8, Yield = 1.7%
Conoco Phillips (COP) - P/E= 7.5, Yield = 2.4%
Exxon Mobil (XOM) - P/E= 9.5, Yield= 2.1%
Husky Energy (HSE) - P/E= 9.4, Yield = 4.4%
Canadian Oil Sands Trust (COS.UN) - P/E= 14.0, Yield = 10.3%
Chevron Corp. (CVX) - P/E= 9.2, Yield = 3.0%
BP PLC (BP) - P/E = 9.1, Yield = 5.7%
Devon Energy (DVN) - P/E= 9.9, Yield = 0.7%

These things are all trading as if their earnings growth is done. They are likely all pricing in earnings growth of less than 6% going forward (at most). In the face of production that is becoming more and more difficult to grow, their futures likely depend on the price of oil. Where is it headed?

Conoco Phillips chart below:


Dividend Growth Investor said...

Ten years ago during the asian/russian financial crisis everyone was predicting that oil would go to $6/barrel and that the emerging markets economies will further collapse.
Ten years later, everyone predicts oil at $200/barrel and the end of the world as we know it.
That's why I believe that oil will most likely slip further from here ( we might get another leg up to 145 before we drop below $100/barrel).
So I agree that we might see $60/barrel sometime in the future. I don't think it will affect oil stocks that much however.

MG (moneygardener) said...

at the risk of saying 'its different this time'. Brazil, Russia, China, and India's large economies might prevent a major extended drop in oil. That is not to say we will not touch $60/barrel, but I don't see the price as sustainable down there given the size of the BRIC nations and their drive to live like the western world.

Dividend Growth Investor said...


We'll see which country swims without a bathing suit, once the rising commodity tides/prices start falling down.

I personally think that some countries like Russia have been expanding mainly due to the increase in commodity prices. That's the only way they could afford to nationalize oil companies ( yukos) and discourage investments in certain natural resources companies/sectors.

Just my opinion..

Uncle Pickles said...

Oil is normalizing to the new long term price of 80-90$. I'm sure there will be dips to 60$ range as there will be 100$ plus spikes. It is tough to be a dividend growth investor in this field, have a look over 15-20 years of data. The dividend growth is sub-par. I'm sure we'll see COS.un cut the distribution in the future and perhaps even HSE if their production costs keep increasing on their heavy oil ops. However HSE is in a nice position of being almost debt free.

Anonymous said...

Gates and Buffet looking for oil sands investment?

They seem a little late to the CNQ / SU party.

Was it a dog and pony show?

simplelifemaker said...

here is my 2 cents.

i think energy demand will keep raising because china's hunger for oil doesn't slow down since china still growing at fast pace.

But I don't think the oil cartel can control the oil price much longer, since alternative energy is being develop.

All in all, Consumers would simply go for the cheapest option available. At $80/barrel, I think consumers would rather burn oil instead of sipping alternative energy drink.