Now matter how high oil prices go, investors hoping to strike it rich will need to know where to drill. But some people see plenty of choice spots. Early prospectors hit a few gushers by tuning out the noise questioning last year's big rise in oil prices. Exploration outfits Apache ( APA) and Chesapeake ( CHK), for instance, have rocketed 40% and 67% since last spring on strong commodity prices. Even so, some experts believe the really big energy discoveries are yet to come. "As you know, we like energy stocks -- a lot," Robert Howard wrote to subscribers of his Positive Patterns investment newsletter late last month. "And they have done well for us over the years. But honestly, now more than ever, we think this may be the time for you to overweight your portfolio in the sector." If anything, Howard has seen his optimism rise along with oil prices that, last week, hit a 13-year peak of $38 a barrel. Howard is convinced that cheap energy may finally be a thing of the past. And he isn't necessarily alone. A number of industry experts believe that tight supply and strong demand may keep energy -- and thus energy stocks -- expensive for some time to come.
All Aboard!Last week, Merrill Lynch analyst Steven Pfeifer pointed to a possible new catalyst for energy stocks. Pfeifer believes the Street has finally come to share his view that energy stocks will continue to benefit from high energy prices. So he's now waiting for mutual funds, in particular, to step up their buying. "Mutual fund investors are 22% underweight the energy sector," he noted. "With the Street finally warming up to the group, we think it important to consider the impact if institutional investors move from an underweight to an overweighted position."
Pfeifer went on to single out ConocoPhillips ( COP) as his favorite pick in the group. He also likes ChevronTexaco ( CVX) and ExxonMobil ( XOM). Howard likes the supermajors as well. He even recommends Royal Dutch/Shell ( RD), despite the company's massive writedown of proven reserves. "We have NO reservations about buying Shell here," he wrote last month. "Be our guest." Howard says the supermajors are valued on the basis of $25 oil. Still, he likes the drillers -- particularly Baker-Hughes ( BHI) -- even more. Indeed, he sees big opportunities across the energy sector. "If oil goes to $40 or $45," he said, "it will be like shooting fish in a barrel."
Target PracticeLast week, A.G. Edwards analyst Bruce Lanni predicted that oil might actually hit $40 a barrel in the very near future. He pointed to pressures on both supply and demand when making his argument. He said the U.S. is stockpiling available oil in its Strategic Petroleum Reserve at a time when the Organization of Petroleum Exporting Countries is laying out plans to scale back its production. Meanwhile, he said, oil demand --fueled by economic growth in China -- continues to surge elsewhere in the world. Lanni, therefore, believes that oil could actually rise from last week's $38 peak before settling back to a $30 level that is still higher than consensus expectations. Outside the sector, however, bullish forecasts could be read as a warning. "The thing investors should always remember is that whatever is good for oil and gas is bad for everybody else," veteran bond analyst Jon Cartwright told TheStreet.com on Monday. "It's bad for the economy. ... High gas prices are the same as installing a new tax on consumers." To be sure, the broader market has faltered recently as energy prices have soared. Meanwhile, Cartwright has lost some of his enthusiasm for the energy sector. Although he still likes some companies -- particularly drillers in the shallow waters off the Gulf of Mexico -- he has cooled on the big exploration and production names that have profited most from high energy prices.
"It was a lot easier for me to tell people to buy two years ago, when no one believed" in high energy prices, said Cartwright, who covers energy bonds for BOSC, an affiliate of Bank of Oklahoma. "My only real concern about investing in oil and gas stocks and bonds today is that, now, everybody wants to do it." Even Cartwright expects oil prices to remain between $30 and $40 for the rest of the year. He believes that worldwide oil supplies will continue to be disrupted by political unrest in the Middle East, Nigeria and Venezuela. At the same time, he sees oil demand rising with economic rebounds in the U.S. and China. He points to the latter country, in particular, as a growing consumer of fuel. "The potential that one out of 10 Chinese citizens could have a car 20 years from now puts a huge demand on world oil supplies," Cartwright explained. Bear Stearns analyst Leuffer downplays China's current impact on worldwide oil supplies. He says that China still consumes less oil than Europe, Japan or the U.S. Moreover, he describes oil statistics -- particularly from China -- as unreliable. Still, he acknowledges that China's growing appetite for oil could lift worldwide demand, and possibly prices, down the road. For now, Leuffer offers his own explanations about today's high energy prices. And he singles out the strategic reserve as an especially powerful influence. "Oil traders seem to be viewing the SPR as a black hole into which oil simply disappears," Leuffer wrote. "We think this reflects a belief that the government will not release oil in any situation other than a supply emergency, and that the SPR fill is likely to continue." Leuffer isn't necessarily convinced that such expensive stockpiling is a good idea. Already, he points out, the SPR accounts for 1% of domestic oil demand -- and he sees no reduction in sight. "We believe
a cutback would cause oil prices to fall," he stated. "It would be like giving the U.S. and world consumers a tax cut. However, the government shows no signs of slowing purchases." In the meantime, he acknowledges, investors have started to question whether energy prices will ever fall back to historic levels again. "The sharp rise in oil prices to $37 ... has coincided with a number of significant events involving geopolitics, macroeconomics and the petroleum industry," he summarized. "These have piqued the interest of investors and are causing many portfolio managers to question whether we have entered a new era of sustained high oil prices."