The key to making big money is being ahead of the curve. The further ahead the better.
T. Boone Pickens has spent his life ahead of the curve. He made money in oil when no one wanted to own oil. He saw the coming energy crisis. People considered him crazy, and with a name like T. Boone, that moniker seemed to fit. Now people just consider him rich.
Growing up in West Texas, I learned a couple of things were true: Friday nights were reserved for high school football, and summers had water rationing. T. Boone is now buying up water rights in the West Texas Ogallala aquifer. Some believe he will make more off water than he made off oil. He is still way ahead of the curve.
The only way I have found to play the water shortage is like T. Boone, to buy up water rights. This is becoming increasingly difficult to do. However, the way T. Boone first made his money is still the way we can make money now: Buy oil while prices are falling.
first article for
, I recommended to shy away from oil and go with big-cap companies. I believe it is now time to buy back into oil and be ahead of the curve.
I believe gas prices are down due to summer driving season being over. But the supply and demand issues have not changed; prices are taking a breather, nothing more. If this is an unusually cold winter, prices will get higher sooner rather than later.
Oil companies hedge future oil prices to reduce volatility. The bad news is that
did a terrible job of hedging this year and managed only to reduce its profits.
Amerada Hess has this year's oil hedged at a selling price of around $33, while crude oil sold during that period around $50. It has lost about $720 million in exploration and production earnings for the first nine months of 2005. Earnings were also down due to hurricane disruptions in the gulf, and it lost some production in Europe due to natural decline and maintenance. These declines were offset by new joint-operated fields in Asia and Russia.
The good news is those hedges come off next year.
Amerada Hess consensus estimates are $18.69 next year due to the hedges coming off. This means that Amerada Hess has a forward price-to-earnings multiple of under 7. This company is cheap, as in real cheap.
If you were to put a forward multiple of a more standard sector number of 10, you get a stock of $186.90, and almost a 50% increase from Friday's close just by putting a normal valuation on the stock.
You will make money in oil stocks, the sector has too much potential, and the key is to find a way to make the most money. I like Amerada Hess and bought the stock this past week just for these very reasons.
Oil in the Waters!
The low fruit has already been picked when it comes to oil discoveries. You can stick a straw in the ground in Saudi Arabia and find oil. Oil in the rest of the world is getting harder to find, and even harder to bring to the surface.
, headquartered in the tax haven of the Cayman Islands, is the world's largest offshore drilling company, with a fleet of 92 offshore mobile drilling units. Keeping production constant is becoming very difficult for the big oil companies. Transocean is a natural play for the sector.
Transocean holds 19 of the past 23 world records for drilling in deep water, including the current world water-depth drilling of 10,011 feet in the Gulf of Mexico. If there is oil out there, Transocean can get to it.
Transocean is the first to be able to drill in the Barents Sea and in the deepest water of the Shetland Islands. Transocean has shown the ability to adapt to any type of drilling that is needed to bring oil to the surface.
Capacity is still limited which means Transocean has pricing power on day rates for their rigs; 14 of the company's rigs will come off of contract by the end of 2007. These rigs will be priced at higher rates. Transocean has everything going in its favor.
Transocean has authorized a $2 billion dollar stock buyback, which is around 10% of market cap. Additionally, a forward multiple of around 15 and a growth rate over that makes this a good stock to own.
A few weeks ago I
made the case for
based on the emergence of ethanol as an alternative energy source. Since then, Deere has announced a share buyback program of over 10% of current outstanding stock and a 26% dividend increase. Deere is up about 10% since I recommended it and is still a good buy at these levels.
At the time of publication Layfield was long Amerada Hess and Deere, although holdings can change at any time. A former All-American offensive lineman at Abilene Christian University, John Layfield played professional football for the then-Los Angeles Raiders and later in the World League. After wrestling in Japan, Mexico and Europe, Layfield arrived in the WWE in the mid-1990's. A former WWE champion, JBL was a featured wrester at WrestleMania 21 and can also be seen on
Friday Night SmackDown!
on UPN. Outside of the ring, JBL is a self-taught investor who was recruited to write a personal finance book,
Have More Money Now
, which was released in the summer of 2003. He has appeared on finance shows on CNN and Fox News Network. He is co-chairman of the Smackdown Your Vote! Campaign and he has joined both the USO and Armed Forces Entertainment (AFE) for tours through Iraq, Afghanistan and other Middle East countries. He regularly visits the Walter Reed Army Medical Center and the Bethesda naval hospital to meet with wounded troops.