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Author: WayneOwl Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46837  
Subject: Re: Oil = Tulips? Date: 10/7/2004 6:29 PM
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Howdy....

Anyway, anyone starting to think that the Oil speculation market is reaching hysteria levels? Kinda like the tulips of old? The reason I see for this is all the news coverage of the cost of futures and speculation on oil and etc.

Buffy.... I don't believe this is a valid comparison. The "tulip mania" saw tulip bulb prices rise from the equivalents of pennies to several thousand dollars. Also, while the world would be a drearier place, a few less pretty flowers would not be a calamity. On the other hand, without sufficient O&G for energy, plastics, and chemicals our economies face an apocalypse. We do not yet have viable alternatives. I don't believe I exaggerate.

Sounds to me like that could be a very dangerous game, and I hope our country (gov't) doesn't get caught up in it.....Buffy (who thinks the speculation will get worse the the oil situation real quick...)

Yes, there is speculation. But any more than in the other derivatives markets about which we have also been reading so much? In fact, one might argue that consumers locking in prices for future deliveries is in fact a very prudent course of action. Likewise, for a producer who needs a predictable ROI to satisfy his bankers.

( I submit that Put and Call Options on a company which may someday produce a drug that relieves pain, if it doesn't kill the patients first, is where the real speculation is these days ! )

I got about 20% of my portfolio in low P/E oil extraction/distribution companies

Good move, DCFNewbie! I recall suggesting several months ago here on FC that investors would be wise to at least hedge their personal energy expenses by making appropriate investments in O&G Royalty Trusts/LPs; even if they did not want to plunge more deeply.

I would point out, though, that while P/E ratios may be valid for the oil services sector and downstream operators, they are not the usual valuation metric for producers ( or extraction companies, as you refer to them ). Most industry comparisons are made mainly on the basis of proven reserves and cash flow ... with some more minor factors such as netbacks, undeveloped land holdings, and others thrown in just to make our task more difficult.... :-)

In conclusion......Yes, the sector is booming. Six months ago, the "commomn wisdom" was that Oil would retreat to the mid-20's per bbl. with NG back under $ 4.00 / mcf. I don't read that anywhere anymore.

Due to all the factors in play, I won't even try to predict within what range, or when, prices will stabilize; but I intend to stay in the game.

Best 'o' luck
Wayne



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