Where to Bet on Rising Oil Prices

Not all oil exploration and production companies are created equal -- and that's something to remember as oil prices skyrocket north of $100 per barrel and you and every other individual investor is seeking out exposure to the commodity. The key, of course, is to invest in a company with a good operating track record and high-quality reserves that's also a bargain.

That's easier said than done, of course, because that combination rarely -- if ever -- exists. But for investors looking to get a start judging the best potential investments in this space, there are four critical questions to ask of any company:

1. How much oil does it have?
2. What kind of oil is it?
3. How difficult and expensive will it be to get the oil to market?
4. Where is the oil located?

No more easy money
The best scenario is that you've found a company with gobs of light, sweet crude located just below the surface in a politically stable place near major markets -- like Texas. But again, the world has been drilling for oil for more than 150 years now, and that combination is unlikely to exist anywhere.

Instead, the odds are you will have to compromise, ending up with heavy, sour crude instead of light and sweet, or getting the enhanced cost and risk-profile of drilling in very deep water, or taking the chance that the collapse of a government in Africa won't lead to a renegotiation of your ownership rights or halt in production. Because at higher and higher prices of oil, every one of these situations -- or even heavy, sour crude in very deep water in anarchy -- becomes a potentially profitable investment.

And while the market has become savvy about assessing oil reserves relative to their size, type, and cost of production, too many investors are still underestimating the range of political risks associated with owning assets in countries such as Brazil, Russia, Nigeria, and so on. So where are the best places to be investing if you believe in a future of higher oil prices?

A disturbing reality
Take a look at 10 countries with the highest proved oil reserves: 

Country

Reserves (BBbl)

Government Type

Corruption Rank*

Saudi Arabia 264 Monarchy 50/178
Canada 175 Parliamentary Democracy 6/178
Iran 138 Theocratic Republic 146/178
Iraq 115 Parliamentary Democracy 175/178
Kuwait 104 Constitutional Emirate 54/178
United Arab Emirates (UAE) 98 Federation 28/178
Venezuela 98 Federal Republic 164/178
Russia 74 Federation 154/178
Libya 47 Authoritarian State 146/178
Nigeria 38 Federal Republic 134/178

Sources: CIA World Factbook and Transparency International. *Higher number indicates most corrupt.

When there are only two democracies (one of which is Iraq) and two countries that rank among the top 20% least corrupt places on this list, it's time to be worried about the stability of the world's oil supply. Frankly, unless the NHL moves all of its teams to the U.S. Sun Belt, there's only one country on this list not at-risk for some type of political chaos over the next decade.

Now consider the largest current exporters of oil, the countries that stand to benefit most from rising oil prices:

Country

Exports (KBbl/day)

Government Type

Corruption Rank*

Saudi Arabia 7,322 Monarchy 50/178
Russia 7,194 Federation 154/178
Iran 2,486 Theocratic Republic 146/178
UAE 2,303 Federation 28/178
Norway 2,132 Constitutional Monarchy 10/178
Kuwait 2,124 Constitutional Emirate 54/178
Nigeria 1,939 Federal Republic 134/178
Angola 1,878 Republic 168/178
Algeria 1,807 Republic 105/178
Iraq 1,764 Parliamentary Democracy 175/178

Additional data from U.S. Energy Information Administration. *Higher number indicates most corrupt.

One country sticks out from the rest. If -- after reading all of this -- you're suddenly thinking about Canada and Norway as very attractive potential long-term investment opportunities, then we are on the same page.

The market is catching on
It was with this idea in mind that I purchased shares of Canadian Oil Sands Limited back in December. Although I didn't foresee the political unrest that would rattle North Africa and send oil prices higher, that turned out to be a near-term catalyst for a still-promising long-term investment. My thesis was (and remains) that oil prices, driven by unceasing demand in the U.S., Europe, and Japan, and growing demand in China and India, are going higher over the long-term and that oil situated in politically stable places is worth a premium. Based on the recent relative performances of E&P stocks, that market is coming around to the same conclusion.

First, take a look at the five best-performing large E&P companies over the trailing-three-month period and their returns during the prior three-month period.

Stock

Trailing-three-month return

Prior three-month return

Marathon Oil (NYSE: MRO  ) 46.9% 10.8%
Imperial Oil (AMEX: IMO  ) 39.7% -2.7%
Suncor Energy (NYSE: SU  ) 24.3% 8.6%
ConocoPhillips (NYSE: COP  ) 23.0% 18.9%
Devon Energy (NYSE: DVN  ) 22.9% 16%

Returns calculated to 3/8/11; data from Capital IQ.

Now, the five worst-performing:

Stock

Trailing-three-month return

Prior three-month return

CNOOC (NYSE: CEO  ) (1.1%) 32.9%
Ecopetrol (1.0%) 9.4%
Apache 4.0% 23.5%
Sinopec 6.8% 13.3%
PetroChina (NYSE: PTR  ) 7.9% 16.3%

Returns calculated to 3/8/11; data from Capital IQ.

What's clear is that investors have soured on companies such as China's CNOOC that not only operates in but has been aggressively buying assets in more politically risky places and have instead embraced companies that may have higher extraction costs, but operate in more stable places -- particularly the Canadian oil sands. Yet despite this recent outperformance, this sub-segment of the energy sector continues to look most promising to me.

The global view
What the recent events in North Africa prove is that change is ultimately coming to corrupt and/or authoritarian regimes that previously promised investors certainty or stability. Further, many of those regimes are currently in control of top 10 global oil reserves or are top 10 oil exporters. As these countries work through political change, that will not only put additional pressure on oil prices, but it may change the status of the agreements that govern oil ownership and production in these countries.

That's a massive risk for investors and for E&Ps currently buying assets in Africa and Latin America, and a good reason why Foolish investors should consider adding politically stable oil exposure to their portfolios.

Get Tim Hanson's top global stock picks by joining Motley Fool Global Gains. Tim's "Global View" column appears every Thursday on Fool.com.

Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of Canadian Oil Sands Limited, which is a Global Gains recommendation. CNOOC is also a Global Gains pick. The Motley Fool owns shares of Devon Energy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is winning.


Read/Post Comments (18) | Recommend This Article (29)

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 March 10, 2011, at 12:03 PM, MalcolmMcEasy wrote:

    good article.

    .

    I'd like to see a chart showing what % of supply each company gets from each country.

    .

    That way, we can see how unrest in each particular country might affect each company.

  • Report this Comment On March 10, 2011, at 3:29 PM, topsecret10 wrote:

    Don't you usually place your bet BEFORE oil goes up $40.00 per barrel ?

  • Report this Comment On March 10, 2011, at 8:21 PM, ershler wrote:

    topsecret10,

    I bought CAT at $24 and sold a lot of it at $50. Since it was trading over $100 a couple days ago the person I sold it to could have done quite well themselves.

  • Report this Comment On March 10, 2011, at 11:25 PM, dschleicher wrote:

    Buy the companies that sell and use the picks and shovels that search for more of this limited natural resource like NOV and FSESX! I did.

  • Report this Comment On March 11, 2011, at 1:31 AM, traderbach wrote:

    "When there are only two democracies (one of which is Iraq) and two countries that rank among the top 20% least corrupt places on this list, it's time to be worried about the stability of the world's oil supply."

    Sounds logical but traditionally the very corruption of the authorities in oil-rich countries is exactly the medium which has allowed the oil companies to have a free hand in grabbing & monopolizing resources & exploiting them in the cheapest possible manner w/ no regard for the indigenous people or their environment.

    That said I myself have been steadily accumulating juniors in Canada & the US Bakken for the very reasons that you state & that added to this politically volatile world are the repercussions of the first climatic effects of global warming & the much greater effects to come, wrecked food supplies, mass emigrations etc. Yes Canada looks good indeed!

  • Report this Comment On March 11, 2011, at 1:32 AM, buddyglee wrote:

    i not following . should i invest in jordans and sport jerseys?

  • Report this Comment On March 11, 2011, at 7:59 AM, susan400 wrote:

    Tim , WTI crude was 30$ fall 08, a week ago it hit $ 105, so TFM writes “how to invest for higher oil prices”

    African country risk always there, naming OPEC countries that have been OPEC since 30 yrs ago, born today?

    Oil is a commodity, higher prices incite supply, there are all kinds of oil deposits to be exploited the world over. High prices quell demand.

    The M-E future looks far more positive than anuytime in 100 yrs.

    Oil peaked as specs filled with fear foolishly loaded up. There are two sides to markets.

    There are two sides to markets. Oil is down 8$ so far.

    “How to invest for falling oil prices”

    susan

  • Report this Comment On March 11, 2011, at 10:57 AM, NoviceBrian wrote:

    Since when is Texas considered stable? JK, Don't go all Wild Bill on me now.

  • Report this Comment On March 11, 2011, at 12:00 PM, jimmy4040 wrote:

    I think you left COSWF off your chart even though you stated in the article that you own it. It's up 27% as of today during that time frame.

    Also for the advernturesome, BNO is illiquid, but is up about 25% for the same period. I used it to play the difference between WTI and Brent. So far so good, but you really have to trade out of it every day or two. Not for the buy and forget it crowd.

    Now for the REALLY adventuresome, here's a scenario.

    This nation has some of the world's largest oil resources in the Colorado shale. It's expensive to get at and very dirty. However the market may take care of the expensive part at $100 a barrel or more. A GOP victory in the Senate in 2012 would eliminate the environmental obstacles to mining. Among the majors, Chevron, Exxon and Shell are the most involved in this possibility. It's not actionable now, but by summer 2012 if things look good for the GOP, it will be time to see what results 12-15 month's exploration has produced.

    A GOP victory in 2012 would also produce a major change in off shore and Alaskan drilling policy which might have the reverse effect of lowering the cost of oil so as to make shale uneconomical to produce.

    Bottom line, I wouldn't make any investments in the oil nat gas area that rely on projections beyond November 2012.

  • Report this Comment On March 11, 2011, at 12:51 PM, eremmell wrote:

    I would recommend SDRL and TOT as current plays on oil. SDRL is offshore drilling, Both companies pay good dividends. SDRL has been on a serious upward trend recently, and just paused for a refresher when the market dropped. See:

    http://www.wikinvest.com/wiki/Tot

  • Report this Comment On March 14, 2011, at 12:12 AM, CLUELESSINLUXEM wrote:

    Didn't read the full article,just got as far as Iraq being listed as a democracy, and had to stop.Is the author all right in the head?or doesn't he know that democracy will be a long time comming to that troubled place.Canadian oil/tar sands seem like a reasonable risk.

  • Report this Comment On March 15, 2011, at 7:04 AM, susan400 wrote:

    ?massive risk for investors and for E&Ps currently buying assets in Africa and Latin America" how massive? capital only gets paid for taking risk. Some want that risk, Africian countries NEED capital and that keeps oil flowing.

    "investors soured" because one day they realized what is true always? There are TWO sides to a mkt, if someone sours, they sell to someone excited to take that risk at that price.

    There are some new cos raising capital to just explore off of Africa. ne has 700 million. I will get the name.

    80 let alone 100$ oil INCITES supply/production.

    2-3 yrs out? tqke off some M-E risk and ooiill could be 40-60 for some time.

    I think TMF called it..........

  • Report this Comment On March 15, 2011, at 5:31 PM, mcintorb wrote:

    Canadian Oil Sands are essentially an operating arbitrage play enabling the operators to "convert" low cost natural gas used to fuel the extraction process into high priced oil (with a side of subsidies). When we finally figure out we can use the natural gas directly as a transportation fuel (an established and proven technology) without going through this messy, inefficient, and environmentally destructive switcheroo in the Canadian wilderness, we may start to make some progress on energy independence, greenhouse gases, and reduced government inteference in energy markets. We might even be able to stop the ridiculous subsidies for corn-based ethanol where government is putting its thumb on the scales to enable the same kind of operational arbitrage in the bread basket states (good luck getting 50 votes in the senate to stop that party!)

  • Report this Comment On March 16, 2011, at 2:35 PM, crca99 wrote:

    IMO, first, the article educates well. I learned something about oil companies and about international governments that I won't forget and will return to when I need refresher. I didn't know there were so many governing types.

    Second, I find the short sighted ethics offensive. I have marginal objections when we humans take advantage of other's addictions in tobacco, booze and gambling companies, but when we humans state without qualms that destruction of millions of acres of Canadian wilderness, with animal and plant extinction, is good business, I revolt at our arrogance. I feel the same about Global Gains recommended Chinese fertilizer companies that destroy the water and oceans with polluted run-off. I won't start on coal.

    The future good businesses will be those that balance planetary activities. The rest is greed.

  • Report this Comment On March 16, 2011, at 2:40 PM, TMFMmbop wrote:

    Our fertilizer recs sell "green," humic acid-based products, which are intended to help reduce the problem of dangerous run-off.

    Tim

  • Report this Comment On March 18, 2011, at 5:07 PM, Chippy55 wrote:

    What's the big deal with all of these foreign countries exporting oil? The U.S. has access to almost 2 trillion, underground, in shale, in the Gulf, off the Atlantic seaboard, and off California. Oh that's right, the checkerboard bracket maker is too busy golfing and bowing to the liberal tree huggers to care. We don't need any of these countries, we already are energy independent, oh wiat, that's just for exploration as another goofy liberal commander in chief remarked again for the umpteenth time. Duh, Exxon-Mobil has been exploring for 50 years, they have maps and surveys, they know exactly WHERE all of the oil we need is.

    Instead, you got these Liberals who whine, I'd rather see it shipped 8,000 mines through radical Muslim lands, than to risk spilling a drop on land. And don't even think of drilling in 100 acres of ANWR out of the millions of acres up there. And, keep allowing all of those countries to take oil 12 miles off our coast, and let the USSR BENEFIT MASSIVELY from high oil prices, duh, wouldn't it be in the interest of the US to put the Soviets out of business by pumping our own oil, driving down the costs, expanding businesses here, so we can continue to feed the world?

    Elections have consequences. Remember those 3 words 599 days from now.

  • Report this Comment On March 18, 2011, at 6:56 PM, kpole wrote:

    Light, sweet crude in Mongolia, which is too small to have made it on this list of countries in this article, has caught my eye. PetroMatad (PRTDF) is currently drilling to see just how much of it they have. It's on my watchlist.

  • Report this Comment On March 18, 2011, at 11:50 PM, ershler wrote:

    Chippy,

    It has been 20 years since the USSR existed. I think your arguments would be more persuasive if you would acknowledge one of the most important events of the 20th century.

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