Tuesday, January 29, 2002

The Color Of Oil

Jim Puplava interviewing Professor Ronald Oligney:

JIM: Looking at the short and the long-term, in your book you wrote that if one were looking at one area to invest in over the next decade to create wealth, energy would be one of those areas. Do you still feel as strongly as you did when you wrote the book?
RON: For sure. With the clear recognition that with the downturn in the Stock Market, energy companies will be punished as badly as anyone else, and maybe worse in a lot of cases. I am personally investing at the moment in a lot of energy issues. I believe it's ridiculous how low some of those are trading and they're going to make a lot of money over the next years. It's certainly a growth business when you look forward. The weak players have largely fallen out. The P/E ratios are trading ridiculously low, the stock valuations compared to cash generation seem to discount the future value of the stocks, when in fact, they're going to be going up, not down. So I feel like there's very solid base for investment there. Certainly that's where I'm putting my money.
JIM: The other thing that strikes me about the industry, if you take a look at the majors, the majors are sitting on 40 billion dollars of cash right now. With multiples this low and price-to-cash flow ratios this low; we've certainly seen a series of acquisitions in the natural gas area. I would not be surprised, I don't know if you would agree with me, that some of the big guys, in trying to replace their reserves, have got to be looking at how cheap these stocks are selling. We're bound to see more takeovers.
RON: That's really inevitable. Of course, that becomes a self-fulfilling prophecy, as you are no longer competing with a long tail of companies that are out there eroding your market value by producing pots of reserves all over the place. It has an effect of lessening the activity and therefore decreasing the supply and therefore increasing the price. So, in some ways, that's why these majors are really in no panic whatsoever to invest and even to build a pipeline from Alaska. You can tell Exxon this is urgent, you need to build this pipeline, but why would they respond to that. Less gas means higher price. They'll wait until they can make a profit; it's not a real problem for them.
JIM: All right, professor, you have a good evening. The name of book is The Color of Oil, written by Michael Economedes and my special guest today, Professor Ronald Oligney.
An additional note from Jim --
Something to think about... a refinery takes 10 years to come on line. It takes 4 years to draft the plans and 6 years to actually build the structure. What would happen to oil prices if the next terrorist attack destroyed even one refinery?

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