December 20, 2006: Lubricate your portfolio for 2007:Oil and Gas picks and a few random energy thoughts

A few days ago, I cautioned generally against natural resource stocks. Several e-mails arrived requesting more specificity, since energy stocks are used as a hedge in many portfolios. Coincidentally, a well respected research department released a lengthy and forward-looking synopsis utilizing their many analysts worldwide to reach basic conclusions and specific stock recommendations. I read the report thoroughly, and found myself nodding in agreement with many of their statements.
I will take action on a few of these myself upon further review.

Here is a summary of thought:

The energy cycle ending in 2010 will have oil fluctuating between 50-70/barrel. Higher oil prices are keeping demand under control, but the supply response has not been good - Russian production is beginning to surprisingly slip away.Access to conventional resources remains a problem. OPEC is back in the market management business, reluctantly, and will achieve or even over-achieve on its price objectives. Consuming governments are likely to formulate more radical policies in support of renewable energy - "but it is not easy being green". The world needs much more energy infrastructure in the coming decade, including a lot more in North America.

In 2007:

OPEC will tighten the market preemptively. They may error by cutting too much.
Non-OPEC supply growth will arrive after several years of delay. Good news.
Expect MERGERS AND ACQUISITIONS IN THE MID-SIZED PRODUCERS to combat rising costs and shrinking access to resources.
Other mid-sized producers will launch LEVERAGED BUYOUTS or GO PRIVATE.
North American natural gas prices will swing between 4-10.00. Companies keep on drilling, then stop. Thus, another wild ride for natural gas.
Global large projects will become even more expensive as they attempt to contain rampant inflation both upstream and downstream.
Consuming governments get serious and adopt more radical energy programs and renewable energy mandates. Billions of dollars will be diverted into Alternative Energy. Biofuels and wind power are favorites.
Russian oil output falls to near zero. Russia by their own stupidity has thrown out the experts they need to succeed.
Norwegian drillers will attempt to consolidate their offshore drilling industry by making both friendly and hostile takeover attempts to primarily US drillers.

Now, some stock picks based upon this scenario:

Baker Hughes (BHI)
BJ Services (BJS)
Global Santa Fe (GSF)
National Oilwell Varco (NOV)
Occidental Petroleum (OXY)
Petrobras (PBR)
Plains Exploration and Production (PXP)
Statoil (STL.OL)
Suncor Energy (SU)
Tesoro Corp. (TSO)
Total (TOT)
Valero Energy Corp. (VLO)
Williams Companies (WMB)

I would also recommend that you check out any ETFs that are heavy into non-Ethanol alternative energy companies. Also, ETF's that favor mid-size companies in this sector for consolidation, speculation and hedge purposes.

www.powershares.com
www.wisdom tree.com
www.iShares.com
www.Claymore.com