Taking Stock

By Tony Crowell
By Tony Crowell
Drilling For Dollars

Crude oil prices have dropped to below $75 a barrel, down 30% this year to a four-year low. The causes stem from changed trends in supply and demand, with consequences to global economies, stock prices and consumer spending. Prices for other commodities, including copper, platinum and silver are also down sharply.

Several converging factors are in play. For decades, China’s enormous growth has averaged ten percent per year, creating huge demand for oil and other commodities. The IMF estimates that growth slowing this year to 7.4%, still strong but an unmistakable indicator for the direction of commodity prices.

China’s prospective slowing was well known but the global economy was less prepared for stagnation in Japan and in Europe. The Bank of Japan is belatedly expanding its bond-buying program but more changes are needed to revive its economy.

In Europe, inflation is under 0.5 percent and unemployment over 11 percent but its banks and leaders are fearful of boosting their economies through bond buying and other economic stimulus. Germany has its foot on the brake, fearful that such programs would disproportionately benefit the weaker Eurozone countries. This 18-country group dribbled out only 0.2 percent growth in the third quarter while U.S. growth increased to 3.5 percent.

The big losers are those whose economies hinge on oil exports like Russia, Brazil and Iran. The U.S. is benefitting from lower gas prices that provide a much-needed stimulus for consumers, particularly those with lower incomes. This is already showing up in retail sales reports, indicating a strong holiday season.

Looking to 2015, U.S. exporters will be pinched if the Eurozone and Japan economies slide back into recessions. Some of the decline in oil prices stems from the burgeoning production in this country from shale oil and gas resources. With energy an essential element of the global economy and with demand growing from the less developed world, it seems quite possible that these simultaneous trends may hold energy prices near present levels.

I recently added EOG Resources (EOG-$99) as a buy. EOG explores and produces oil and gas, has an excellent track record for locating deposits and owns some well-located properties. More critically, it hedges most of its exposure to price fluctuations and recently raised production estimates, even while some competitors are lowering targets. It yields a modest 0.7 percent, however, it has raised its dividend for 14 straight years while operating in a volatile industry.

There is no end to the range of predictions for oil price fluctuations. Goldman Sachs, for example, is now predicting decreasing demand leading to $70 barrel prices next year. This is down from their forecasts in 2012 of $130 and even further down from their 2008 predictions of $200 a barrel.

As this indicates, investors should not try to guess the future but rather take advantage of depressed price ranges. Companies that provide machinery, equipment and services for exploration and production are attractively priced. There are several candidates but I think National Oilwell Varco (NOV-$72) stands out on valuation and standing within its sector.

NOV controls about 50% of the deep-water equipment market and customers sometimes refer to it as “No other vendor.” Its stock is trading at a reasonable 12 times earnings and yields 2.7 percent with dividend increases for the past three years. This is a volatile sector and I suggest taking half positions now with the intention of augmenting them in the near future.

Oil and gas prices often firm up as winter approaches. With the prospect of traditional year-end market strength, selected energy stocks should fit nicely in investor stockings.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622




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