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By John Stephenson
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The oil story continues to be front-page investment news with the world seemingly leaping from one potential crisis to the next. First Iran, then Venezuela. It seems as if there is no end to the potential nightmare scenarios that could unfold and send crude prices spiraling upward. Yet investment banks and the International Energy Agency seem oblivious to most of these concerns. For the most part, investment banks are calling for falling crude oil prices in the year ahead as demand softens and supply continues to grow. So is it time to lighten up on your oil names?
The oil story continues to be front-page investment news with the world seemingly leaping from one potential crisis to the next. First Iran, then Venezuela. It seems as if there is no end to the potential nightmare scenarios that could unfold and send crude prices spiraling upward. Yet investment banks and the International Energy Agency seem oblivious to most of these concerns. For the most part, investment banks are calling for falling crude oil prices in the year ahead as demand softens and supply continues to grow. So is it time to lighten up on your oil names?
Figure 1: Deep Sea, Oil Sands Drive New Crude Oil Supply
Figure 2: Depletion Eats Up 60-70% of Conventional Projected Capacity
That stability was underscored earlier this week when the oil industry's reigning punch line, Hugo Chavez, remarked that he was incensed that big oil was recording Venezuelan reserves on their balance sheets. While the never-ending rhetoric out of Venezuela is in itself worrisome, it underscores a broader point. Increasingly, big oil is reliant on countries such as Venezuela, Nigeria, Russia and Iran to meet their future production forecasts; while at the same time many oil producing regions of the world are becoming more aggressive and antagonistic towards the west.
Figure 3: Alberta Tops Next Decade's New Production
While the musings from Chavez and Iran's Ahmadinejad may be dismissed as crazy talk, they do present a serious problem for big oil. For many of the largest oil companies in the world their reserve life indices (proven reserves divided by current production) have been in decline for some time. The risks of a reserve-write down grow increasingly loud as Hugo Chavez exclaims that this is ãour oilä and should not appear on the balance sheets of foreign oil companies. If reserve accountants start taking a hard line on oil reserves booked in countries with rising nationalism, investors should look for the reserve life indices of major oil companies to tumble in the years to come. While this is bad news for big oil companies (e.g. Exxon, Conoco-Phillips), it is good news for the players in Canada's oil sands projects.
Already, the stock market is starting to differentiate by awar ding higher price/earnings multiples to companies that have long reserve life indices and production from politically stable regions of the world.
While the ride ahead is likely to remain volatile for energy investors, one thing seems certain — a strong or growing reserve life index and stable secure supply seems to be the order of the day. For our money, Canada's oil sands and companies such as Suncor, Western Oil Sands, Canadian Oil Sands Royalty Trust and Petro-Canada that are levered to this resource base should be investment superstars in the months ahead.
John Stephenson
Money Focus Editor.
Source: Haynes Capital Corp., http://www.haynescapital.com/ |
