Thursday, April 19, 2012

Value In Oil & Gas

The process of finding and producing oil and natural gas has rapidly changed and is much more complex than in years past. The majority of oil and gas companies do not build their own equipment that is required to complete the rigorous and costly tasks involved in exploration and production. Instead, they rely on oilfield service providers which build and operate the equipment that is essential to explore, extract and transport crude oil and natural gas.

The Energy Information Administration (EIA) continues to project a steady increase in oil demand through 2035. They anticipate world oil prices to rise to higher levels due to the growth in world demand with limited access to resources. Natural gas consumption is on the rise because it burns cleaner than oil and is more economical to produce than oil.

As oil demand increases and oil becomes harder to find and access, most experts believe that future spending on equipment and services will increase.  In fact, the EIA projects that the total world consumption of marketed energy will expand by approximately 52% between now and 2035.

Natural gas prices have plunged.  It has been all over the financial news.  However, natural gas is the world’s third largest source of energy.  In 2010, natural gas accounted for nearly 24% of primary energy consumption.  Cubic foot consumption of natural gas is still project to increase by 52%, from 111 trillion cubic feet to 169 trillion cubic feet by the year 2035.

In January, House Republicans introduced the American Energy & Infrastructure Jobs Act.  It was a $260 billion proposal, which many believe is really and oil and gas exploration bill, disguised as an all-encompassing infrastructure bill.  If so, that is good news for the oil & gas exploration industry.  Energy stocks, especially oil drilling and refining stocks, are incredibly undervalued, especially when you consider the fact that they are at the beginning stages of a powerful trend. With the national average for a gallon of gas now north of $4 per gallon, we will see an eventual positive correlation with energy stock prices.

The first half of April has not been very good for investors. However, if the market stabilizes and finds its footing then historical trends could continue and this has the potential to be another positive for energy stocks for the remainder of the month. Please check out my article on Seeking Alpha for further insight into April historical sector trends by going to

Specific broad-based ideas to position today would include the following:

Oil & Gas Exploration

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

Oil & Gas Equipment & Services

SPDR S&P Oil & Gas Equipment & Services ETF (XES)

Broad-Based Energy Stocks

Energy Select Sector SPDR ETF (XLE)

Common sense tells me that based on today’s energy prices and continued future demand on the worlds energy supply, that a position in this sector would be a wise investment. Couple this with the individual investor’s appetite for dividend yield, which many names like Exxon (XOM) provide, and we have a winning combination.

Thank you and good luck everyone!

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”