It's Time to Buy Energy

Friday, July 11. Oil prices reach a new all-time high of $147 a barrel and bring with them a crescendo of buzz from investors, corporations, and world leaders. It is the peak of Peak Oil claims.

Monday, July 14. A young energy analyst sporting an ill-fitting tie tells CNBC Asia's Amanda Drury and Sri Jegarajah that oil's run will come to an end, since prices, more than twice the marginal cost to produce the oil, are disconnected from reality.

Since that conversation, oil has slid by $42 in about as many days. Who was this prescient predictor of petroleum prices? Should you be following his every move?

Me. And no.
Rest assured, this isn't a pat on the back about my lucky televised call about oil prices losing steam -- my mom has that plenty covered.

But I have another forward-looking statement for you: With energy prices having fallen precipitously, I believe now is exactly the time to start looking at energy stocks.

Since my last (and, admittedly, first) live TV appearance, oil and natural gas prices have fallen 28% and 43%, respectively -- in just two months. That means that a lot of quality energy names have suddenly found themselves with bargain-bin valuations.

What you must know about energy stocks
Before you consider pulling the trigger on oil or gas plays, though, you must understand this: In the short run, prices are entirely unpredictable. Even by so-called experts.

Witness this week's shutdown of the once-highflying flagship fund of the commodity gurus at Ospraie Management. After returning a market-crushing 15% annually for the past nine years, Ospraie is closing the fund after having lost 27% of its value in August alone. Nine years of stellar returns, and a single month can bring you down. Welcome to commodities investing.

But does the notorious volatility in energy stocks and prices over the short- and medium-term mean you should just punt on the sector? Absolutely not.

While making short-run bets on energy prices is financial roulette for all but the most in-the-know energy traders, the long-term case for keeping oil and gas exposure in your portfolio is perfectly clear. Consider that:

  • Worldwide crude oil consumption has grown 15.8% over the past 10 years. Production? Only 12.9%.
  • Some 90% of the world's oil reserves are controlled by state-sponsored oil companies -- including Saudi Aramco, China's PetroChina (NYSE: PTR  ) , Brazil's Petrobras (NYSE: PBR  ) , and Russia's Gazprom.
  • Recent major oil and gas finds, such as Brazil's Tupi field, the successful drilling of the Jack 2 well off the Gulf Coast, and Kazakhstan's tumultuous Kashagan field, are more than a little inconveniently located -- either a mile-plus under the ocean's surface or in frozen wastelands that make oil and gas extraction an extremely challenging (and expensive) process.

Put that all together, and it's little wonder that you've seen oil prices boom over the past several years. And with all of the strong undercurrents supporting high energy prices going forward, this is the time for you to nail down just which energy plays you'd like to snatch up, should prices fall any further.

3 outstanding energy plays
Since natural gas has been particularly hard-hit, value hawks should be looking toward producers with impressive track records, such as Chesapeake Energy (NYSE: CHK  ) and XTO Energy (NYSE: XTO  ) . With price drops like this, even heavily followed oil majors such as Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) and oil-sands expert Canadian Natural Resources (NYSE: CNQ  ) could once again be catching the eye of forward-looking value investors.

But beyond the big boys, which energy stocks should you be looking at? We're bullish on three outstanding energy plays right now. One is a deeply out-of-favor value play, another is a steady dividend payer with room to run, and the third is a little-known E&P that's poised to pop when energy prices turn the corner.

You can get all three recommendations, along with our rationales for recommending them, by requesting our free report, What You Need to Know About the "Oil Crisis." All you have to do to get it sent to your inbox is click here.

That old Buffett maxim of being "fearful when others are greedy and greedy when others are fearful" is especially true when it comes to commodities investing. So let the fearful keep selling -- and be greedy.

Joe Magyer owns no shares of companies mentioned in this article. Petrobras is a Motley Fool Income Investor recommendation, while Chesapeake Energy is an Inside Value pick. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2008, at 6:38 AM, manuelj76 wrote:

    Agreed. Energy is set to make a modest bounce. First we have the Sept 9th OPEC meeting in which excess oil will be taken off the market to support 100$ a barrel. Then we have Fannie and Freddie making headlines, which would hurt the dollar, prompting investors to take profits from the rise in the dollar, not to mention that Hurricane Ike seems to be headed to the gulf. Natural gas should be a good bet considering cold season is coming also. Expect a bounce back to upper teens.

  • Report this Comment On September 09, 2008, at 12:21 PM, Razor515 wrote:

    Disagree about OPEC. They dont want to start a firestorm before an election. It would be viewed as politically motivated. Dont expect a cut before December at the earliest.

  • Report this Comment On September 12, 2008, at 10:22 AM, manzanita24 wrote:

    It seems to me, that it is time for all who consider themselves ethical human beings to ponder the effect of oil, gas, and coal on our biospheric niche.

    While gaining wealth is of course attractive in our society, to continue gathering wealth at the expense of society itself seems a bit, well, pathological.

    Jefferson said every American should have the opportunity for "life, liberty, and the pursuit of happiness." The idea of "happiness" is generally interpreted as personal comfort.

    However, some feel Jefferson's use of "happiness" instead referred to the ancient Greek concept of "eudaimoneia," which was a sort of well-being experienced by a person at the end of their life--a life in which all their actions had been directed toward the human good.

    Purchasing oil and gas at this point in history is contrary to the human good. It is, however, congruent with personal pleasure and the accrual of personal wealth with no thought to social/biospheric effect.

    it is time to support solar and wind technologies with our wealth. Or, at the very least, to examine one's life and admit that one's only interest is in self-comfort.

  • Report this Comment On September 12, 2008, at 10:45 AM, scollins1225 wrote:

    So manzanita, is it safe to assume you live in a cave or hut, plant your own seeds to harvest? Do you drive a car? Wear clothing made from animals? Do you eat meat? Do you buy food from a store? Was it transported with vehicles using fossil fuels???

    Of course, I really don't care about your answers to these questions... Only thinking, that to certain degrees, it could be rather hypocritcal to "live" or exist in any means beyond what our ancestors did in the Bronze age... oops, bet some mastadon was a bit unhappy with ancestors pursuit of food, clothing, etc.

  • Report this Comment On September 12, 2008, at 11:24 AM, mudman90039 wrote:

    I do have money invested in oil and gas because we can't live without it. But I also have 3 companies that are working in alternative energy fields. They're going thru the same rise and fall as oil and natural gas. But at least they have a little more money to help them along. I'll be looking for more of these companies too.

  • Report this Comment On September 14, 2008, at 12:06 AM, AndreaKW wrote:

    I don't usually post, but I feel moved to support manzanita24. I do live in a house, own a car and wear leather clothing and eat meat. But I do all of these less than I used to.

    Some while back I went to a book launch of a book "Affluenza", which advocated a more modest and thoughtful attitude towards human consumption. Inevitably, the argument counter to the book was " what about the economy". As a microbiologist I said in response "Humans are no more intelligent than yeast cells. We put yeast cells into a closed system (a bottle) with a certain amount of food (resources) and leave them to consume the entirety. They then die in their own excrement (wine) and we then drink it."

    Earth is a closed system guys - where will we get more oil or gas when it runs out? Where will we find a new tiger to replace the last one that got killed for its body parts? Are we really going to be happy with just seeing all animals just in man made enclosures because we have poisoned the environment that they have inhabited? I am not averse to consuming - just let's think about whether we really need that SUV when we only drive to the shops. do we really need that extra plasma that uses up so much of our unrenewable resources? Think a bit, please.

  • Report this Comment On September 14, 2008, at 12:30 PM, greenlady88 wrote:

    Change happens when we support it with our money. This is a basic reality. I have been investing in green techs. We need these technologies and I do think it is the ethical thing to do. I also believe that it will be the profitable thing to do. We will have gas and oil for some time... who knows exactly how long. But we need to use it to get alternative energies installed. With attitudes like mud man our children will be living like people did in the bronze age. It is time to wake up, if not for yourself for your children.

  • Report this Comment On September 14, 2008, at 1:28 PM, Longing4Cheese wrote:

    I agree with all the comments except for scollins1225, who employs the tedious rhetorical strategy of exaggerating the other's position ("straw man"). Please....

    I have found www.socialinvest.org to be helpful when comparing funds. However, I am a neophyte investor compared with many on this site. Is there an area / discussion board here devoted to Socially Responsible Investing?

    I would like to discuss SRI with other like-minded individuals.

  • Report this Comment On September 16, 2008, at 1:49 AM, mybestfriend wrote:

    I bought Exxon in July and it has gone straight down. Do I just hold on to it or what?

  • Report this Comment On September 17, 2008, at 10:41 AM, gibbsgirl wrote:

    I own Exxon. I am holding for the long term. I reinvest dividends. I have taken a loss, big, but I am still ahead. have no doubt that it will come back. I bought Exxon when it split several years ago.

    A dear friend was a millionaire just owning Mobil Oil, purchased on a payroll plan and reinvesting dividends.

    I personally believe this is a buyers opportunity. Long term is the answer. It is in my retirement portfolio.

  • Report this Comment On October 05, 2008, at 9:22 PM, sparkyray wrote:

    For the time being I support the oil industry because I think it is essential. Oil consumption will become a thing of the past and will be very expensive, since it is sparse. The airline industry should get the better oil deals, so in turn they can offer special deals to those that travel for business. Now that’s what makes the world go round!

    Other sources of energy will be the new way of consuming energy on an everyday basis because it is economical and it’s good for the environment.

    I've seen great losses in my oil and solar energy stocks but I'm holding on to them.

  • Report this Comment On October 20, 2011, at 10:46 PM, scollins1225 wrote:

    Seriously, cheese??? I guess you don't get sarcasm, but someone says that those investing in oil, gas or coal is pathological or mentally ill and I'm exaggerating. I am just stating that unless you're willing to dismiss the technological advances that allow us to live in comfort and still have the opportunity to explore and invent alternative solutions and innovate in general, then you are the one being hypocritical - especially if you are benefiting from those very things you are condemning. (By the way how is Solyndra working out for ya???)

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