Profit When Oil's Have-Nots Crash

Companies that have pushed the envelope have, in effect, rolled the dice, and their fate at the table will depend on such unpredictable elements as hurricanes, politics from Bolivia to Nigeria, stalemate or all-out war in the Middle East and the speed with which new oil field technologies develop.

Look for Strong Hands

But I do know that, in the current environment, I'd like to own oil and gas companies that are dealing from a position of strength and that are in a position to pick up assets if some other company in the field should stumble. My very short list of companies in that position would include ExxonMobil and Chevron(CVX).

I'd certainly like to avoid oil companies that may be feeling desperate to add to reserves at any cost. I'd worry about BP, for example.

But as an investor, I'd also recognize that any desperation to acquire reserves works to the benefit of the shares of smaller companies that own reserves, especially reserves in highly desirable, politically predictable regions. In my energy portfolio, I'd look to balance my exposure to an Exxon Mobil with shares of some potential acquisition targets. A list might include Devon Energy(DVN), EOG Resources(EOG) and Quicksilver Resources(KWK).

A final word on the implications of this situation for oil-service and oil-drilling stocks: I don't think rising prices are good for a sector when it leads potential customers to delay work or cancel projects. That's where I think we are right now with drilling and service stocks. The bottlenecks that have raised prices to historic highs in the present now look like they could be producing a softer market in 2007 and 2008, just when major new capacity is due to arrive for drilling companies.

At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: EOG Resources and Quicksilver Resources. He does not own short positions in any stock mentioned in this column.

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