Oil's Ascent Keeps Majors on the Offensive

Talk about $50 oil is starting to sound so yesterday.

Ending months of speculation -- and misplaced warnings about a severe "correction" -- oil broke through the $50 barrier this week and, in fact, kept barreling right toward $51 on Tuesday. Oil stocks, still shunned by some on Wall Street, followed that same upward path. ConocoPhillips COP, which offered a sneak preview of its third-quarter performance on Tuesday, surged to an all-time high. Other super majors, including BP BP and ChevronTexaco CVX, approached fresh records of their own.

Oppenheimer analyst Fadel Gheit says that investors are simply chasing winners now. He says that oil stocks have risen 30% in a year when the market has remained largely flat. But he still worries that the "energy bubble" will burst.

"People are convinced that they are going to be smart enough to bail out before the crash," Gheit said. "But that's the same thinking of people who invested in Internet stocks a few years ago."

Like many, Gheit has been wrong about oil prices so far. He believes that unfounded fears about supply disruptions have driven oil to unreasonable -- and unsustainable -- levels. Thus, he continues to forecast a major price reversal even as oil keeps climbing higher.

Gheit notes that dot-com doubters were considered wrong for years before they were finally proven right.

"Trees don't grow to the sky," he said simply. "Fifty-dollar oil is like an uninvited guest. You may have to put up with it for a while. But eventually, it will leave."

Better Company

Still, even Gheit recommends buying the super majors right now.

He calls it "the lesser of two evils." He believes that energy prices will crash and, when they do, investors will bail out of the exploration and production sector -- most influenced by energy prices -- and into the more diversified super majors. Therefore, he suggests buying companies like ConocoPhillips ahead of that shift.

Even Prudential analyst Michael Mayer -- who is neutral on other oil majors -- likes ConocoPhillips. He says the company has "fully delivered on the merger synergies" it promised when Conoco and Phillips united. He, therefore, expects the company to begin trading more in line with its peers.

Just last week, Mayer actually raised his price target on the stock from $85 to $87 after ConocoPhillips announced its successful bid on a stake in Russia's largest oil company. He noted that the acquisition will increase ConocoPhillips' exposure to promising oil markets in both Russia and Iraq. He expects the acquisition to boost the company's earnings by 25 cents a share next year alone.