Oiling the Economy
Somnath is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As “crude” as Oil
According to the Energy Information Administration (EIA), which provides official energy statistics from the U.S. Government, world crude consumption grew by an estimated 1.0 million barrel per day in 2011 to a record-high level of 88.3 million barrels per day. In 2010, oil demand increased by over 2 million barrels per day to 87.3 million barrels per day, which more than made up for the losses of the previous 2 years, and surpassed the 2007 level of 86.3 million barrels per day (reached prior to the economic downturn). The long-term outlook for oil, however, remains favorable given the commodity’s fairly positive demand picture.
Crude oil prices in the remainder of 2012 are likely to exhibit a sideways-to-bullish trend. Crude oil production in the United States is projected to grow by 74%, or more than 4.9 million barrels per day (MMb/d), during the next 10 years to an average of 11.6 MMb/d by 2022. While domestic demand is relatively soft and the global economy still showing signs of weakness, the fact that demand is outpacing supply appears to be evident.
As “natural” as Gas
Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. Known as ‘shale gas’ -- natural gas trapped within dense sedimentary rock formations or shale formations -- it is being seen as a game-changer, set to usher in an era of energy independence for the country. The success of this unconventional fuel source has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.
As a result, once faced with a looming deficit, natural gas is now available in abundance. In fact, gas stocks -- currently some 10% above the benchmark levels -- are at their highest level for this time of the year, reflecting robust onshore output.
How can the economy grow from Oil and Gas industry
• Upstream technology gains will lead to long-term economic growth: Unconventional activity is underpinned by such a large resource base that expanded production is expected to continue for decades, providing a base for solid growth and long-lasting well-paying jobs.
• Increasing natural gas production through 2017: U.S. natural gas production in 2017 will be over 6 trillion cubic feet (Tcf) per year due in part to the use of the new technologies and representing a volume that is nearly double U.S. gas imports in 2011 (of 3.5 Tcf). These gains reflect a 30-percent increase over 2017 production projections made in 2008.
• Added oil production reduces oil imports: Oil and liquids production is also increasing rapidly, totaling an additional 630 million barrels in 2017, a volume that is nearly equal to total 2011 U.S. crude imports from the Persian Gulf (of 680 million barrels).
• Industry gains a boon for the U.S.economy: Upstream technology developments have impacts that affect all sectors of the economy, including the oil and gas service sector, oil and gas material suppliers, oil and gas equipment manufacturers, consumer goods, industries that use natural gas, and the businesses that supply all of these sectors.
• Significant GDP gains: The study forecasts a net increase of $167 to $245 billion in GDP in 2017 due to recent upstream technology advances, equivalent to between 1.2 percent and 1.7 percent of the 2010 U.S. GDP (of $14.5 trillion)
• Total employment gains exceed the entire U.S.auto manufacturing industry employment: The study projects additional annual employment gains of 835,000 to 1.6 million jobs nationwide by 2017, the equivalent to more than the entire U.S. auto manufacturing industry (including parts suppliers) at the low end. Sectors of the economy experiencing the greatest employment gains include the service sector, manufacturing, wholesale and retail trade, and the oil and gas sector itself.
• Growing net exports help realign the U.S.trade balance: The GDP gains are associated with roughly $120 billion additional net exports annually by 2017, which equates to nearly one-quarter of the U.S. 2010 international trade deficit (of nearly $500 billion)
Going strong on profits and cash reserves
The significant increase in crude oil supply will outpace demand growth, leading to downward pressure on U.S. oil prices. Considering the turbulent market dynamics of the energy industry, its always good to invest in the relatively low-risk conglomerate business structures of the large-cap companies, with their fortress-like balance sheets, ample free cash flows even in a low oil price environment and growing dividends. Few of the oil and gas stocks that strong on profits and cash reserves are:
VAALCO Energy, Inc. (NYSE: EGY) an independent energy company, together with its subsidiaries, engages in the acquisition, exploration, development, and production of crude oil and natural gas. The company owns producing properties and conducts exploration activities as an operator of consortiums internationally in Gabon and Angola, as well as conducts exploration activities as a non-operator in the British North Sea. It also operates three shale properties in the United States located in Montana and Texas; and owns minor interests in conventional production activities as a non-operator in Brazos County, Texas, Pickens County, Alabama, and in the Ship Shoal area of the Gulf of Mexico.
VAALCO has a high P/E ratio of 16.17. The revenue growth is 12.58%, while it's earnings growth rate is 6.62%. The debt/equity ratio is very low. The sales figures have shown growth too.
Baytex Energy Corp (NYSE: BTE), an oil and gas company, engages in the acquisition, development, and production of oil and natural gas in the western Canadian Sedimentary Basin and the United States. It offers heavy oil, light oil, and natural gas liquids. As of December 31, 2011, the company had proved plus probable reserves of approximately 252 million barrels of oil equivalent. Baytex Energy Corp. was founded in 1993 and is headquartered in Calgary, Canada.
Baytex’s EPS for the past 2 quarters, (from earliest to most recent quarter) 0.36, 1.33 have been increasing. The P/E ratio is high at 18.13. The payout ratio is 96.85%, while its historical payout ratio has been 151.11%. The ROE is high at 24.94%.
CNOOC Limited (NYSE: CEO), through its subsidiaries, engages in the exploration, development, production, and sale of crude oil, natural gas, and other petroleum products. Its oil and natural gas properties are located in offshore China, which include Bohai Bay, western South China Sea, eastern South China Sea, and East China Sea, as well as in Indonesia, Iraq, other regions in Asia, Australia, Nigeria, Uganda, the United States of America, Canada, and Argentina. As of December 31, 2011, the company had net proved reserves of approximately 3.19 billion barrels-of-oil equivalent. It also provides bond issuance services. The company is headquartered in Central, Hong Kong, and is considered a Red Chip company due to its listing on the Hong Kong Stock Exchange. CNOOC Limited is a subsidiary of China National Offshore Oil Corporation.
CNOOC’s P/E is good at 8.94 and the EPS is 22.22. With a debt/equity ratio of 19.35% is going strong financially.
The United States is in the early innings of becoming energy independent. Over the last 10 years, the U.S. economy has undergone the largest economic expansion in history and cheap oil has fueled this unprecedented growth. An immense market and the promise of continuing growth are why oil and gas is such a sure investment. The stocks of oil and gas industry are bound to soar in months to come.
SomnathGuha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.