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It’s Time To Buy Cash-Rich Oil Majors At 2004 Prices

Oct 29th, 2008 | By Eric Roseman | Category: Oil Investment & Alternative Energy

Crude oil prices have tumbled 55% since July. And oil stocks have been dragged down with them. But Eric Roseman says this is a great opportunity to buy into Big Oil at 2004 prices. These companies are flush with cash and pay out attractive dividends. And they are likely to recover over the next 12-18 months as commodity prices find a bottom.

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The majority of large-cap oil stocks didn’t produce strong gains as oil prices skyrocketed to US$147 a barrel earlier in July. That’s too bad because the massive reversal we’ve seen in oil prices is taking oil stocks along for the ride and making some great bargains along the way.

Despite the fact that oil stocks didn’t surge amid US$100-plus oil, they’ve certainly collapsed on the way to US$63 a barrel. The fact is most of these big companies are priced for US$32 a barrel oil, according to Macquarie Research.
The large-cap oil majors now trade at 2004 prices. The entire sector is now off a stunning 55% from their all-time high and just 5% above their recent lows last week.

Even more compelling, the dividend yields on some of the largest companies are in excess of 4% and, in some cases, above 5%. The European oil majors now yield in excess of 5-7%. That compares quite favorably to 10-year Treasury bonds, yielding a paltry 3.7% or risk-free T-bills, yielding less than 1%.

Even if Presidential hopeful Obama wins next Tuesday and increases the dividend tax rate from 15% to 20% as expected, that still leaves oil investors with a far more attractive tax-adjusted yield. Oil stocks are just plain cheap right now.

Another reason to like Big Oil at these prices is the ongoing carnage suffered in the Energy Patch since prices peaked in July. Global sentiment has turned from irrational exuberance to absolute dismay over the last 90 days with oil prices trading at a 17 month low. Investors are redeeming their natural resource equity fund en masse, NAVs have plunged 50% and OPEC’s recent announcement to cut production did nothing to support prices.

Also, oil legend T. Boone Pickens - who made his fortune in oil - is suffering one of his worse draw downs this year. His hedge funds have crashed this fall with losses totaling more than US$1 billion. Investors are redeeming as losses continue to mount; one energy dedicated hedge fund has plunged 84% in 2008.

Energy bulls enjoyed a glorious era of big profits from 2002 until mid-2008. Now we’re in the midst of a serious correction in the energy bull market. Some pundits even claim we’re now in a bear market as prices have declined more than 50% since peaking in July.

The best time to buy an asset is when absolute disrepute reigns supreme. Investors have gone from embracing oil at all costs to dumping the energy stocks almost daily since July. It’s been a relentless decline.

Now is the time to start cherry picking the large-cap oil stocks at 2004 prices. The large-cap oil companies are still flushed with cash, pay fat dividends and should recover over the next 12-18 months as commodities prices finally trough. I like Big Oil.

Source: Oil Majors Hit The Decks: Time to Start Cherry Picking


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More on this topic (What's this?)
Energy Stocks Will Roar Back - But Not Soon
Crude Oil - Is a Bottom in Sight?
Read more on Oil Prices, Oil & Gas Majors at Wikinvest
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By Eric Roseman

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About the Author

Eric RosemanEric serves as an editor and Investment Director for The Sovereign Society's Commodity Trend Alert. Eric's talents include blending a dozen or more alternative investment funds to produce consistent returns to traditional asset classes and making commodity based recommendations with huge upside and limited downside.

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The Offshore A-Letter specializes is an elite global investment opportunities, asset protection strategies, tax management solutions, second citizenship and residency programs and offshore structures.

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