In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
Here's a piece of information that may come as a surprise: Since the end of 2006, the S&P Global Energy Sector Index Fund (IXC), an exchange-traded fund that counts giants such as ExxonMobil (NYSE:XOM), Schlumberger (NYSE:SLB), Valero Energy (NYSE:VLO), and PetroChina (NYSE:PTR) among its top holdings, is down 11%.
What's more, that same index hasn't gained a cent since September 2005.
I mean, this isn't pet rocks, beanie babies, or foam sandals we're talking about. This is energy! Far from being a fad, global demand for energy has been increasing at record rates, as densely populated countries such as China and India build out infrastructure and grow their economies.
So what gives?
Yes, oil and natural gas prices have been volatile lately, which can explain why energy returns have stagnated over the past 16 months following a serious bull run that started in 2003. And I'll be the first person to admit that I don't know where the prices of these commodities are headed over the next year or two.
But here's something I'll guarantee: Over the next 10 to 20 years, oil and natural gas prices are headed up. Global demographics point to increasing demand and, let's face it, these are limited natural resources. Moreover, while we'd all like to see alternative forms of energy gain a foothold in the global economy, I'm not convinced that any of the current solutions are as reliable or cost-efficient as petroleum.
Spoiler alert: Stock pick upcoming
So where does that leave us? It leaves us with a basket of stocks trading at a discount to their future prospects. Foremost among these is W&T Offshore (NYSE:WTI), a $2.2 billion oil and gas exploration and production company headquartered in Houston and with operations concentrated in the Gulf of Mexico.
What makes W&T so alluring, however, is not just the fact that I believe the present value of its proven reserves is being undervalued by the market, but also that the market has totally disregarded the company's recent $1 billion acquisition of 362 billion cubic feet (bcf) of proven reserves from Kerr-McGee (NYSE:KMG) in the Gulf of Mexico.
Now, at first glance, it may seem like W&T overpaid, particularly if you're one of the analysts who considers the Gulf of Mexico to be a dying region when it comes to oil and natural gas reserves.
But here's what W&T founder and CEO Tracy Krohn thinks about the acquisition: There's a trillion cubic feet of natural gas waiting there that Kerr-McGee failed to prove out because of a lack of investment in the properties. And if there is indeed a tcf of natural gas, then W&T shareholders are sitting on a serious catalyst.
So, who do you trust: Tracy Krohn or Kerr-McGee and the Wall Street analysts?
I'll make this an easy choice
Before you decide, here's the history on Tracy Krohn. He founded W&T 25 years ago with $12,000 in seed capital. Today, the company is worth more than $2 billion, he continues to own more than 63% of outstanding shares, and he was recently buying shares on the open market.
Under Mr. Krohn's leadership and close cash controls, W&T has established an industry-best track record for success with the drill bit and for EBITDA margins. That's a fantastic combination that speaks to the skill of management.
In other words, I'd recommend we put our trust with Mr. Krohn. Our portfolios will thank us down the line. Agree? Simply follow this link and rank the stock "outperform" in Motley Fool CAPS. If not, vote it "underperform." Later this week, we'll tally your votes to determine which stocks will advance one step closer to the title.
Click Disney to read the opposing article in this contest and click here to read all of the other entries in the tourney.
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Tim Hanson owns shares of W&T Offshore Energy. The Fool's disclosure policy encourages you to vote for Pedro if you don't vote for W&T Offshore Energy.
