Oil is headed higher, Big Oil - may be not
If you can accept that all the easy to find oil has been discovered and oil production is on the cusp of a precipitous decline, it is easy to understand why crude oil price is headed higher. The bull market in crude over the last few years has been driven by surging demand from a growing world economy - especially the newly industrializing giants like China & India. Sheer size of their population puts tremendous pressure on resources, especially energy. This trend will continue at least into the near future. Many major oil fields the world over, are in decline. New production coming online will not come close to replacing the declining production from existing fields, let alone fulfill growing demand. So we find ourselves in this dire situation with staggering demand growth and flat to declining supplies.
Big oil companies are struggling to replace their reserves. These giants have been enjoying the current bull market in oil. Hardly any of their surging profits are directed back into finding new fields. The execs who run these Goliaths know better than we do, that new exploration may not be a worthwhile investment. The way these giants have been replacing their reserve is through acquiring other oil companies - with substantial reserves. Case in point is Chevron. But, for the controversial acquisition of UNOCAL, Chevron would have hardly replaced what they produced last year. These behemoths will have to pay higher and higher price to acquire new reserves. Profitability of producing from reserves acquired when oil was trading for $15 will soon disappear.
Valuation of these companies are based on reserves as much as it is based on profitability. So dwindling reserves and higher oil prices may mean that the growth in stock price may not be as much as other midsized companies. So investors looking for growth need to look elsewhere. It is my opinion that, mid-sized oil producers will turn out to be a better investment bet in the coming years. These nimble midsized oil production companies would be good acquisition targets, currently trading at a big discount compared to their reserves.
Another area that investors could consider is Canadian Oil sand companies. They can profitably operate their business with Oil trading upwards of $35. Oil sand companies have the potential to increase production unlike US oil giants.
Until later,
Oil Shock
© 2006 Oil Shock for TheViewFromThePeak.com
Big oil companies are struggling to replace their reserves. These giants have been enjoying the current bull market in oil. Hardly any of their surging profits are directed back into finding new fields. The execs who run these Goliaths know better than we do, that new exploration may not be a worthwhile investment. The way these giants have been replacing their reserve is through acquiring other oil companies - with substantial reserves. Case in point is Chevron. But, for the controversial acquisition of UNOCAL, Chevron would have hardly replaced what they produced last year. These behemoths will have to pay higher and higher price to acquire new reserves. Profitability of producing from reserves acquired when oil was trading for $15 will soon disappear.
Valuation of these companies are based on reserves as much as it is based on profitability. So dwindling reserves and higher oil prices may mean that the growth in stock price may not be as much as other midsized companies. So investors looking for growth need to look elsewhere. It is my opinion that, mid-sized oil producers will turn out to be a better investment bet in the coming years. These nimble midsized oil production companies would be good acquisition targets, currently trading at a big discount compared to their reserves.
Another area that investors could consider is Canadian Oil sand companies. They can profitably operate their business with Oil trading upwards of $35. Oil sand companies have the potential to increase production unlike US oil giants.
Until later,
Oil Shock
© 2006 Oil Shock for TheViewFromThePeak.com
posted by Oil Shock at 4:22 PM
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