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Four Energy Plays We Like: EOG, Whiting, Oasis And Continental

The U.S. economy is continuing to slowly expand as we move into March. As I thought, the fourth quarter GDP was revised to a positive 0.1%. This appalling rate is near stall.

We now are in sequestration and have a tax increase in addition. The macroeconomic effect of sequestration is not catastrophic in my opinion. However, all the cuts come from the discretionary part of the budget. This will have a larger, short term effect on GDP. I believe investors should continue to expect volatility in the near term.

The Italian election, currency wars, or the aforementioned tax increase along with sequestration will increase policy-related risks for both the financial markets and world economies.  Currency devaluation can produce GDP gains in the short run, however, they very rarely end with positive outcomes.  This is especially true when most of the major central banks in the world are practicing a “beggar thy neighbor” policy.

However, all is not lost. There are signs of growth in the emerging markets around the world. China’s slowdown was a major concern in 2012. However China is showing growth again. Indonesia, Mexico and several other developing countries are expanding as fast as or faster than the BRIC nations.

Overall I believe that world growth should be better in 2013 than 2012.  Even as the emerging markets and the United States slowly gain traction, investors should be aware of continuing volatility in the markets.

Amidst the entire world’s economic travails, the U.S. economy has several areas of potential growth. The U. S. housing market is showing signs of improvement. U.S. manufacturers are doing better than their foreign competitors.

Lower energy prices are enabling our manufacturing companies to be more competitive. Increased spending by individual companies, the improved housing markets, and an overall increase in global trade is benefiting our manufacturing sector. This is beginning to show up in corporate results.

Companies that provide power tools, air-conditioning, flooring, furniture and concrete are showing increases in sales. There are signs that home improvement spending is increasing this year.

Employment activity continues to expand, but at a level that will only slowly bring down unemployment. In addition, the developing world’s need for materials, energy and technology will continue to expand.  In my opinion, this should keep Brent Crude price in the $110 to $120 per barrel range.

As more pipelines come on stream and more efficient, rail and other forms of transportation become available, I believe the price of WTI crude will narrow the price gap with Brent. There should still be a sufficient divergence to give an advantage to American companies who have a broad exposure to the products needed in emerging markets.

With the technological developments in the oil & gas industry, American companies that use energy as a fuel or as raw materials will be more competitive against companies in high cost countries in my opinion.

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