BOSTON ( TheStreet) -- Bullish commodities analysts see oil hitting $150 by next spring. Such a spike, while a detriment to economic growth, would bring outsized gains to energy stocks.
Chevron (CVX) and larger rival Exxon Mobil (XOM) delivered record profits in 2008, following crude's meteoric rise to $147 a barrel. We may be in the midst of another energy bull market as oil has retained a foothold above $90 and is enjoying support amid improving global demand fundamentals.
Chevron is scheduled to report second-quarter results Tuesday. The company's stock has advanced 15% in 2011 and 50% in the past 12 months as the commodities boom widened the company's profit margins, bolstering net income. Chevron's first-quarter pre-tax margin, at nearly 20%, ranked in the 73rd industry percentile. Return on equity, the critical measure of profitability for stockholders, was outstanding, at 20%. One critical investment metric, which renders Chevron more attractive than key rival Exxon, is its balance sheet. Chevron held $1.7 billion of net cash (cash minus debt) at the quarter's end, so it has flexibility to pursue acquisitions, amplify financial leverage or increase the quarterly dividend.
Exxon's debt load overshadowed liquidity by about $2.6 billion. Both firms remain compelling energy investments, given their scale, geographic diversification and management quality. Cornerstone Analytics, a closely-followed forecaster, has projected a $170 plateau for black gold. The supply picture remains tenuous, which is one reason that bulls may have the upper hand, going forward. Turmoil in the Middle East has crimped output in that region, as global demand continues to increase. So-called strategic reserves in oil-consuming countries are meager. The International Energy Agency released 60 million reserve barrels in late June.While this catalyzed the most recent correction in the market, its magnitude is overstated. In fact, 60 million barrels a day is only two thirds of the world's daily oil consumption. Total emergency stocks amounts to just 18 days of supply, according to Barron's. In sum, upside demand risk is prevalent. Peak oil, the point at which global extraction hits is apex is fast approaching and, in fact, may have already passed. Optimists estimate that 2020 is the year that the production curve will begin its descent. Unless we have steadily weaned ourselves from fossil-fuel reliant technology by then, oil prices will continue to rocket due to scarcity. In our current political and economic environment, this is the most plausible scenario.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV