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Martin Tillier

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Stay on the Energy Train, Even if Oil Prices Derail

Energy is in a boom, but that doesn’t necessarily mean that oil is booming, at least in terms of price. There are several factors that lead me to conclude that, while NYMEX crude is unlikely to collapse, upward momentum will be hard to come by over the next couple of years. The shale revolution and improving technology in deep water drilling are increasing supply while reducing costs, and at the same time “alternative” energy is becoming increasingly mainstream, practical and affordable. Even in the short term, the oil market’s collective shrug of the shoulders as problems persist in Syria and the Ukraine indicates that sellers have the upper hand. A drop back to the $80/Barrel support for NYMEX crude looks far more likely in the near term than a break through the resistance at $120.

That bearish stance on oil prices, however, doesn’t mean that I am bearish on energy stocks. Established, big oil companies such as Exxon Mobil (XOM) and Chevron (CVX) will quite possibly remain capped and continue to underperform, but there are several opportunities, both in alternatives and in smaller exploration and production companies that investors can sink their teeth into.

Alternative energy stocks have had a great year, but if they continue to fulfill potential it may be that, in the immortal words of Bachman Turner Overdrive, “You ain’t seen nothing yet.” The industry is beginning to wean itself off of dependency on government support and winners and losers are beginning to emerge.

Call me brave (or stupid if you prefer), but despite the volatility of the last couple of weeks, I’m still a believer in fuel cell stocks, for example. Plug (PLUG), Ballard (BLDP), FuelCell (FCEL) and all are a dramatic example of one of the first things I learned about markets as a young, interbank forex broker back in the 1980s. Traders are, by nature, over reactors; when you spend all day staring at screens and waiting for news that is almost inevitable. When PLUG announced their contract with WalMart (WMT) every stock in the sector looked like the next Google (GOOG); just a few days later and they looked like pets.com.

The reality, of course, is that they are neither. PLUG in particular is a company that is only now beginning to focus where they should, on supplying its GenDrive fuel cell units, then contracting to service them and supply fuel. Customers will pay a premium for even a slight shade of green now and in the future, and hydrogen fueled power is about as green as it gets. They have a future and a clear path to sustained profitability, so while the move up was too far too soon, anywhere around $6 will probably look mighty cheap in a couple of years.

Plug Power

PLUG is extremely risky, however, and recent volatility makes this not for the faint of heart so averaging in over the next few months may be the best strategy. More conservative investors don’t have to miss out on the alt energy boom, though. Something more mainstream, like First Solar (FSLR) still looks value, despite today’s jump on improved outlook at a forward P/E of around 18.

As I said, though, just because I am not bullish on NYMEX crude, that doesn’t mean that there aren’t oil stocks I like. Cobalt International Energy (CIE) is one.

Coabalt
 
They have recently shown one very desirable attribute for an exploration company…luck. CIE has a 42% stake in a deepwater field off the coast of Angola in partnership with BP (BP) among others, and the first four exploratory wells revealed significant oil reserves. That is significantly lucky when discovery averages 50%. Commercial viability of the wells is yet to be proven, but after a series of disappointments in other areas the stock is depressed enough to make CIE a relatively low risk bet.

Energy investing has changed beyond recognition in the last few years. Shale extraction, alternatives that are no longer the stuff only of tree huggers dreams and the fact that people around the globe continue to procreate have all contributed to a booming market. Those that scream “BUBBLE!” with every move up are probably the same ones that said that the NASDAQ Composite above 1000 in 1995 was a danger sign. An awful lot of money was made from that point to the peak of 5000 five years later, and there is still plenty to be made in energy stocks too, even if the price of oil stagnates.

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By Martin Tillier of Oilprice.com


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