Buy SeaDrill (SDRL)

Scary financial engineering or buying opportunity? As is usual with SeaDrill (SDRL), some of both. But I think the final addition comes out on the plus side and I’m going to buy shares (the New York traded ADRs actually) of this very aggressive Norwegian ocean drilling company in Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ today.

SeaDrill announced another bit of financial engineering yesterday. Hemen Holding Limited, a company controlled by trusts established for the benefit of John Fredriksen, chairman of the board at SeaDrill, and his family, announced that it had sold 24 million shares of SeaDrill stock. (After the sale Hemen will still own 109 million shares of SeaDrill. The company has about 470 million shares outstanding so a sale of 24 million shares amounts to about 5% of total shares.)

SeaDrill’s American Depositary Receipts were down 3.1% yesterday and today have fallen another 1.4% with the general market as of 12:30 p.m. New York time.

The selling news is enough to give anyone pause—after all investors are rightly told to beware of stocks where insiders are selling massive numbers of shares. But I think, after looking at the deal, I’m going to recommend SeaDrill as a buy anyway—although I do think you might want to build this position slowly in case the selling by Hemen drives the price lower in the next few days.

The sale by Fredriksen has more to do with his ambitions to buy a fleet of oil tankers for his new company Frontline 2012 than it does with any desire to cash out on SeaDrill. Read more

Why there’s talk of $120 a barrel oil, maybe even $150–and three stocks to take advantage of that possibility

Oil week has just ended in London.

This year International Petroleum Week, the annual gathering of the oil industry, has been dominated by just one topic: Iran. And the talk focused not on the potential for war but on the consequences of the sanctions against Iran that have already been put in place.

From what I can judge from reports from the events that ended Wednesday night—my invite to the closing black-tie dinner seems to have been lost in the mail again—oil traders think that the sanctions against Iran will require the country to find new customers for 750,000 barrels of oil a day. That’s about a third of Iran’s daily exports last year. Traders see some prospects for Iran making up some of the slack from customers such as India, but the consensus is that there simply isn’t enough demand from new customers for Iranian oil and the Iranian industry is looking at production shutdowns.

Which, of course, leads to oil trader’s favorite sport—speculating on the price of oil. Read more

Buy Concho Resources (CXO)

Back on January 13 I added Pioneer Natural Resources (PXD) to my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ . The logic, I argued in my post on that pick http://jubakpicks.com/2012/01/16/buy-pioneer-natural-resources-pxd-in-my-long-term-jubak-picks-50-portfolio/ was that Pioneer Natural Resources was part of the boom in U.S. oil production out of the tight shale formations of the Permian basin. Unlike wells drilled in natural gas shales, wells drilled in this region produce lots of liquids and with oil prices stuck north of $100 a barrel and natural gas prices stuck well south of $4 a BTU, investors, I argued, want to buy liquid-rich producers such as Pioneer Natural Resources.

The market apparently agrees. This pick is up 13.5% since I made it on January 13. At today’s price of $110 it’s closing in on the $115 target I set for December 2012. (At this point I’d say I’m likely to raise that target.)

Today I’ve got another play on the same story. Concho Resources (CXO) is a little smaller than Pioneer Natural Resources (a market cap of $11.7 billion versus $13.4 billion), a bit faster growing (with production in 2012 projected to climb by 28% at Concho versus 24% at Pioneer), slightly cheaper, and a bit riskier. Read more

Now that oil is a long way from the $145 per barrel peak it hit in July 2008 and nobody on Wall Street is predicting, as Goldman Sachs did in 2008, that oil is headed to $250 a barrel, we’re not hearing much about peak oil anymore.

The peak oil model, initially developed by oil geologist King Hubbert and which accurately predicted a peak in U.S. oil production between 1965 and 1970, says that the production from an oil field grows exponentially over time, then peaks, and finally declines. The model has been applied to individual oil fields, national oil industries, and global oil production. Back in 2008, the fiercest proponents of peak oil as a global model were predicting that the world would start running out of oil sometime around 2020.

Now that the world is awash in oil, the only people talking about peak oil are its opponents, who are dancing on what they depict as the grave of what they call a “theory” that was never worth the graph paper it was plotted on.

Well, I still think that the peak oil model is the most useful description of what we see happening in the oil industry today—even if West Texas Intermediate, the U.S. benchmark, closed at a twitch under $100 a barrel on Friday, February 3. (Brent crude, the European benchmark closed at $114.58.)

And, I’d go on to say that the peak oil model is the best way to understand what’s happening to the prices of other commodities, especially copper.  (Full disclosure: I predicted that oil would go to $180 a barrel shortly before it began its collapse from the $145 a barrel high in 2008. And full, full disclosure: The only one predicting $250 a barrel oil right now is Iran, which is threatening that prices will reach that level if developed economies impose tougher sanctions on the Iranian economy in an attempt to slow or stop that country’s development of a nuclear bomb.)

And I think it’s even useful for thinking about how to invest in commodities such zs iron ore that, currently, don’t fit the peak oil model at all.

Let me explain why I still find so much value in this “discredited” theory. Read more

The United States has become a net exporter of oil.

Pick yourself up off the floor. It’s true—at least by one definition of “oil.” And the change will have major effects on U.S. economic growth and on what you should hold in your portfolio.

Let’s start by nailing down exactly what I mean by oil.

The U.S. is not about to become a net exporter of crude.

In September the United States exported a whopping 35,000 barrels a day of unrefined crude oil. That same month the U.S. imported 9 million barrels of crude oil a day. If you look just at crude, the U.S. is the same huge importer of oil that it’s been for as long as most of us can remember.

But if you look at the figures for refined petroleum products, the picture is shockingly different. In September the United States exported 3.2 million barrels of refined petroleum products a day and imported just 2.2 million barrels a day. That’s roughly a surplus of exports over imports of a million barrels a day. For the first nine months of 2011, according to the U.S. Energy Information Agency, the U.S. exported 752 million barrels of refined petroleum products—gasoline, jet fuel, kerosene, and such chemical industry feed stocks as ethylene, butane, and propylene.

The swing in less than a decade is immense. In 2005, for example, the U.S. imported 900 million barrels of refined petroleum products more than it exported.

This huge shift doesn’t have just one cause. Read more