Oil’s Well That Ends Well

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

It’s as tough to figure out as John Kerry’s baffling prescription for resolving the Iraqi mess. In brief, how do you play the torrid oil market?


Everyone knows, of course, that oil is overpriced, according to some estimates, by as much as $12 to $15 a barrel. By the same token, we also know it could trend higher because of the fear factor – that’s fear of potential shortages, terrorism, and supply disruptions. Meanwhile, given this year’s spike in oil prices from the high $20s to nearly $50 a barrel, which will fatten energy company earnings, just about every brokerage is touting some energy stocks.


But which energy issues, if any, do you chase? That’s what reader, Henry Greeley, wants to know. In a recent email, he wrote: “Dan, I read your piece [August 13] where you quoted an analyst saying oil could rise to $60 to $70 a barrel. Unfortunately, there was a serious omission. You didn’t make any stock recommendations. Could you please follow up soon with some names, preferably companies listed on the New York Stock Exchange. Also, I know these stocks are already up a lot this year, which leads me to wonder if they really are still worth buying. Could you please comment on this, as well. Thank you.”


Energy stocks are indeed up. In fact, they’re leading the market this year, spurting 14.2% through August, versus a 0.69% decline in the S &P 500. So energy stocks are not exactly undiscovered.


Over the past couple of months, many energy experts were cocksure that oil, come early September, would be trading in the high $20-low $30 a barrel range. Wrong! Oil (light crude for October delivery) closed yesterday at $44.61 a barrel.


Meanwhile, on the question of whether energy stocks are still inviting, given their 2004 run, chief investment strategist Fred Dickson of D.A. Davidson & Co., Great Falls, Montana, captures the prevailing mood. “You’ve got to own energy, and portfolios should definitely be overweighed in it,” he said. The energy sector, he believes, offers the prospects of greater safety and security in this roller-coaster market, as well as further strong capital gains.


His top energy pick (also favored by a number of other energy trackers): Oil and gas exploration and production company Chesapeake Corp. ($14.47), which Mr. Dickson rates a 20% gainer over the next 12 months.


Jefferies & Co. is another energy bull. In particular, it favors offshore drilling companies especially those leveraged to the early stages of the recovery in the deepwater market. Its top picks: Atwood Oceanics ($43.29), 12-month target: $49; GlobalSantaFe Corp. ($28.76), target: $43; Noble Corp. ($41.54), target: $53, and Transocean ($31.79), target: $41.


Standard & Poor’s also remains gung-ho on energy, observing that its bullish outlook has as much to do with business fundamentals, as it does with high energy prices. Significantly, it thinks some energy stocks are poised to outperform the market even if oil prices retreat somewhat (which is what most pros expect). S&P, for example, calculates that oil, based on current supply/demand conditions, should sell at slightly above $30 a barrel.


While oil supply and demand are said to be fairly balanced now, S &P points out conditions in many oil-producing regions are precarious. For example:



  • Fighting continues in Iraq.

  • Venezuela has survived its latest political shutdown, but more are likely.

  • Russia remains in a tax battle with one of its major oil companies.

  • Sporadic violence continues in Nigeria.

  • There are frequent terrorist threats against Saudi Arabia.

A disruption in any of these regions, observes S&P, could cause shortages, which, in turn, would put pressure on the economy and stock prices. In fact, reacting to higher oil prices, the advisory service is urging investors to cut back on their stock exposure and has chopped its estimated GDP growth in the current quarter from 4.7% to 3.4%.


Scanning the energy sectors, S &P offers these thoughts:



  • The large international oil companies offer a defensive investment in an uncertain economic environment because of their conservative accounting practices, steady cash flow and diversified operations.

  • In the case of contract drillers, increased demand from the major oil companies will increase day rates and rig utilization.

  • Oil and gas exploration and production companies have approached the current cycle of high energy prices in a more disciplined manner than previously. Typically, when energy prices climb, E &P companies increase production quickly. But in the current cycle, production increases are coming at a more measured pace, and this has helped improve important financial measures like returns on capital and free cash flow.

Among S &P’s favorite energy stocks are Nabors Industries ($45.27), the world’s largest land drilling contractor; 12-month target: $54; Noble Energy ($54.33), an independent E &P compa ny that generates 55% of its revenues from natural gas; target: $66, and Total SA ($98.687), a French-based international oil company that operates in 120 companies; target: $105.


***


Say goodbye to yet another of the city’s premier restaurants, the Box Tree, the latest victim of the real estate boom. A voice-mail message tells the story when you dial the restaurant – as of August 30, the restaurant has closed its doors.


Dating back to the mid-70s and practically a landmark, the Box Tree, long one of the city’s top French-style restaurants, was bought in April 2002 by Moishe Lax, a publicity-shy chasidic diamond merchant. He closed it when he bought it and then reopened it in December of that year as the city’s most expensive glatt kosher restaurant.


Located on east 49th Street between 2nd and 3rd Avenues, just a few blocks from the Waldorf-Astoria hotel, the restaurant, as well as an attached European-style 13-room inn, both located in a twin-adjacent townhouse, will be torn down to make way for a high-rise luxury condominium building.


Slowing sales were not a factor in the closing. Actually, business was just fine, Mr. Lax tells me. “There is just more opportunity in real estate than in restaurants,” he said. “So we closed the Box Tree.”


The replacement luxury condo building will be built by E &S Management, a New York developer with more than 2,000 residential units in the tristate area.


E &S partner Elliott Spitzer (no relation to the state Attorney General), said construction on the new building, which will be replete with million-dollar residences, will begin shortly and sales will commence next year.


The New York Sun

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