Energy: Where the Money Is Once Again

It's an interesting and likely profitable time -- although somewhat confusing -- to be an energy stock aficionado.

You likely have all manner of questions about the group. We all do. So maybe the new predictions that are cropping up about future supply, demand, and price trends will help us to free our heads from this oily vice. At the same time, I might be able to convince you why I think that Schlumberger (NYSE: SLB  ) and Chevron (NYSE: CVX  ) are among the most promising investment targets in today's fast-changing times.

The cartel weighs in.
OPEC recently raised its forecast for global oil consumption, although not by as much as I might have. And this week, the International Energy Agency (IEA), the Paris-based group that counsels the industrialized world on a range of energy subjects, weighed in with its own revised thoughts about the future. But since the IEA takes a longer-term perspective -- out to 2035 -- let's focus on OPEC's closer-in thoughts, even though the agency almost always is more bullish and looks for higher growth than the cartel.

OPEC hiked its demand expectation for 2014 by 800,000 barrel-per-day. With those extra barrels, the 12-member group -- which produces about 40% of the world's oil -- thinks total global demand will reach 89.9 million barrels a day in four years, 5% higher than it's looking for this year.

Curiously though, OPEC's Secretary-General Abdalla Salem El-Badri doesn't think that a price increase to $90 a barrel that might result would throw a monkey wrench into the world's economic recovery. And it probably wouldn't, if $90 were the limit. But with crude now trading above $87, is it really likely that we'll see only another $3 increase in the next three years?

Will the Gulf shrink?
After all, while we in the U.S. now have natural gas almost coming out of our ears -- although we don't yet have sense enough to use it to the extent we should -- domestic oil production could be hindered for longer than we think by the ongoing slowdown in the Gulf of Mexico. That fertile body of water formerly accounted for about a third of our nation's output.

Now, however, even with the moratorium cancelled, as my capable colleague Toby Shute told you last week, the Bureau of Ocean Energy Management, Regulation, and Enforcement is moving at a snail's pace on the permitting front. I'm therefore looking for Gulf production to back off while its costs move higher, driven by an array of new regulations and equipment requirements for drillers like Diamond Offshore (NYSE: DO  ) .

Then there's China. On Monday, The Wall Street Journal said that, "A swell of new car owners and double-digit percentage economic growth is spurring oil consumption across the country, and refineries are having trouble keeping up." Beyond that, the paper quotes Paul Ting, a specialist in the Chinese energy scene as saying that the country has experienced massive fuel inventory drawdown during the past seven consecutive months. On that basis, we may hit OPEC's $3 increase by spring -- or sooner. (The IEA expects China to account for fully 36% of world demand growth through 2035.)

So, where's reality?
How high, then, could crude prices go in, say, the next couple of years? Unlike Goldman Sachs analyst Arjun Murti's prognostication in 2008, $200 seems vastly unlikely to me, even given an ongoing improvement in the western economies and an unabated demand ramp in China. So, as I've indicated, is $90.

But predicting is tough. We don't know how fast the western economies will recover, while geopolitics always includes a number of imponderables, the natives of Nigeria's prolific Niger Delta are again indulging in kidnappings and threats, and the pace of a movement to increased gas usage remains uncertain.

So let's create a broad enough target that you could drive through without scraping paint. I'll just aim for something above $100. Heading in that direction, it appears, again makes energy the primo sector it was until mid-2008.

And, we should play this how?
What are the best ways to play the promise of energy? Clearly I like oilfield services leader Schlumberger. It's the biggest and most geographically diversified of the group, along with being a technological leader. That being the case, it'll work wherever the action is in the industry, and with seismology being lifted in importance by both the Gulf accident and increasing drilling costs, its WesternGeco unit will hardly be an impediment to the company's growth.

That's not to say I wouldn't happily put money into a National Oilwell Varco (NYSE: NOV  ) , for instance. National Oilwell is well suited to profit from Brazil's offshore build-out. But, if asked for just one selection, I like Big Daddy.

There are also numerous solid exploration companies to be savored. Apache (NYSE: APA  ) , for instance, typically reaps additional production from plays discarded by its peers. But for now, let's focus on Chevron. Why? Simply because the more I examine the group, the more of a keeper America's second-biggest producer appears to be. It's developed incredibly sophisticated technology for sniffing out oil in the deepest of the deepwater. And it's not unequipped on the gas side, if only because of its massive Gorgon LNG project off Western Australia.

And there are others.
But don't turn up your nose at ExxonMobil (NYSE: XOM  ) , another Big Daddy that is active worldwide and, with its XTO acquisition, has suddenly become a leader in unconventional gas in the U.S. and maybe eventually in Europe. Nor would I shy away from Petrobras (NYSE: PBR  ) , which remains a good way to play the amazing string of big deepwater finds offshore Brazil.

That should be enough to get you started. Your only other task, it seems to me, is to beseech, whomever or whatever you're used to beseeching, for a rapid rise in the use of clean-burning and plentiful natural gas in the U.S. Were that to occur to a meaningful extent, OPEC's price prognostication just might become the real number. 

National Oilwell Varco is a Motley Fool Stock Advisor recommendation. Chevron and Petroleo Brasileiro are Motley Fool Income Investor selections. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.


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