JBL: The Politics of Oil

Despite the warm winter and oil inventories being abnormally high, geopolitics still rule the day. After Friday's explosion in Saudi Arabia that was intended to disrupt oil production, oil is up again on geopolitical concerns. Al Qaeda has sworn to harm the kindgdom's oil infrastructure.

It just so happens that most of the places we buy our oil from are unstable.

Nigeria, Africa's leading oil exporter and the U.S.'s fifth-largest supplier, just had a militant group claim that it wanted to take out 30% of its oil production. This week the militants' attack on a pipeline switching station caused Shell to halt 455,000 barrels of oil a day. The militants want two of their leaders released from jail and greater oil revenues, and they vow to disrupt oil flow until they get what they want.

Iran, the No. 2 producer in OPEC, recently balked at talks with Russia over a deal to accept enriched uranium from the former Soviet Union. It says it will continue with its nuclear program despite the threat of sanctions. The country sits on the strategic Straits of Hormuz, through which 40% of the world's oil passes each week.

Venezuela, despite importing 60% of its oil to the U.S., has stated that it would like to see the day when oil from the quasi-communist government goes to places other than the U.S.

Notice a trend? That's without even throwing in Algeria, Indonesia, Libya and Russia.

Until now, we as a nation have done absolutely nothing to address the supply or demand sides of the oil equation. We will still not likely address the demand side, because of politics, but we will address the supply side. Basically, what worked last year will work again this year.

Homegrown Oil

There will be a significant push to make the U.S., finally, independent of foreign oil. Several things will be pushed by our Congress. Ethanol will be a huge part of our medium-term solution. I recommended Archer Daniels Midland (ADM) a few weeks ago on the basis of its ethanol production, and I still like the stock.

The oil sands in Canada are another great viable alternative for imported oil. In mid-November I recommended Suncor Energy (SU), and it is up 40% since then. I still like Suncor, but I would not be a buyer at this price.

What I do like here are the U.S. land drillers, which are poised for a huge rally. No geopolitics, no hurricane disruptions.

Oklahoma-based Bronco Drilling (BRNC) went public last fall and is a bargain at current levels. Bronco has a forward price-to-earnings multiple of just over 8, with a growth rate in excess of 30%. Bronco has 45 land-drilling rigs in Colorado, Texas and Oklahoma.

Bronco recently reported fourth-quarter earnings of 31 cents per share, beating estimates of 23 cents per share. It reported $6.9 million in net income vs. a year-earlier loss of $1 million and credited the operation of more rigs for the increase in revenue.

To watch JBL's video take of this column, click here.