The Energy Debacle

The following numbers were pulled from the October 2005 report from the Energy Information Administration:

Total worldwide oil demand:
2004 – 82.5 million barrels per day
2005 – 83.7 million barrels per day
2006 – 85.6 million barrels per day

Total worldwide oil supply:
2004 – 83.0 million barrels per day
2005 – 84.3 million barrels per day
2006 – 85.5 million barrels per day

As readers of this blog are aware, I think buyers of energy stocks are current prices will be handsomely rewarded. Most are down 20% or more this month alone. ConocoPhilips (COP) has forward P/E of 6.4x. Occidental (OXY) is 7x. Plains (PXP) is 8x.

It is true that dramatic commodity price erosion from here would put these estimates in jeopardy, and therefore make these P/E’s irrelevent. However, when I see numbers like the ones from the EIA, along with $60 oil and $13 natural gas today, I tend to think the reaction right now on Wall Street is out of line. We’ll just have to wait and see.

Enjoy this post? Subscribe and never miss another one: RSS | Email | Twitter

2 Thoughts on “The Energy Debacle

  1. tick junkie on November 3, 2005 at 6:22 AM said:

    I tend to agree with your view, analyst are once again not aware of the true fundamentals in the market making the valuation of these companies very hard. I believe that the recent sell off is that the novice trader saw a 10 buck sell off in crude and thought that it would be a nice time to sell off the oil stocks that they probably have been making a killing on in the last few months. What people should really focus on is what oil / refiners have as a business plan. Meaning do they refine heavy sour or light sweet crude’s, these spreads on the heavy side have incredible margins. These company’s live and die by the crack spread and we must be aware that the correlation too many of these companies have been trading with the outright crude contract which I do not agree with. Another thing to consider is the hedging programs that these companies employ especially because of the increased volatility in the energy markets as of late. I have never sent a message like this before but thought that your comments were interesting.

  2. Jack Miller on November 14, 2005 at 9:56 AM said:

    Chad, as usual I respect your point of view but I can’t go with you on this one. I don’t know the history of EIA but experience with other government agencies suggest that they will be wrong at the top.

    T. Boone Pickens has been right-on the numbers. Wednesday, he said that oil is moving toward $50. On the other hand, he was supportive of your view after a period of weakness. He said he does not believe world wide supply can be brought much higher than $85 MPD.

    I wonder if you guys are counting all the GTL and CTL that is in progress. Nigeria, China, Quatar and others are building plants. The latest article I read suggest that COP is working with Nigeria with a projected cost for feed stock coal to be the equivalent of $10 per barrel and the finished product at $28 per barrel. Other articles have suggested that current technology only gets you to the $40 range.

    Furthermore, I understand the investment in Alberta Tar Sands has gone balistic. If this is true, the production in this area could be 10 MPD or more!

    Besides, as the Political Calculator has pointed out, the law of substitution is working on demand. He used an example of rubber plants being grown to avoid oil costs.

Post Navigation