(OXY) Archives - Page 7 of 7 - Mad Hedge Fund Trader

I have kept oil companies in my long term model portfolio for many years now. But there are a lot of belles at the ball, but you can?t dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics class, which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, fighting rebels and bandits, crawling out of the desert starved, lice ridden, and half dead.

I concluded in my paper that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10 (USO).? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk.

He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians?

I told him everything I knew, including the two weeks spent in an Algiers jail for taking pictures in the wrong places. His parting words were to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities, I stumbled across (OXY) once more (click here for their). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005.

(OXY?s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, to 2.90%, more than ten year Treasury bonds Need I say more?

The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. A lead in fracking is a huge plus. I think (OXY) will continue to make money, no matter what the price of oil does. That?s why it lives in my long-term model portfolio.

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

Can You Spot the Double Agent?

A Faberge Egg

My inbox was clogged with responses to my recent prediction of US energy independence. This will be the most important change to the global economy for the next 20 years. So I shall go into more depth.

The energy research house, Raymond James, put out an estimate that domestic American oil production (USO) would rise from 5.6 million barrels a day to 9.1 million by 2015. That means its share of total consumption will leap from 28% to 46% of our total 20 million barrels a day habit. These are game changing numbers.

Names like the Eagle Ford, Haynesville, and the Bakken Shale, once obscure references on geological maps, are now a major force in the country?s energy picture. Ten years ago North Dakota was suffering from rampant depopulation. Now, itinerate oil workers must brave -40 degree winter temperatures in their recreational vehicles pursuing their $150,000 a year jobs.

The value of this extra 3.5 million barrels/day works out to $122 billion a year at current prices (3.5 million X 365 X $96). That will drop America?s trade deficit by nearly 25% over the next three years, and almost wipe out our current account surplus. Needless to say, this is a hugely dollar positive development.

These 3.5 million barrels will also offset much of the growth in China?s oil demand for the next three years. Fewer oil exports to the US also vastly expand the standby production capacity of Saudi Arabia.

If you want proof of the impact this will have on the economy, look no further than the coal ETF (KOL), which has been falling relentlessly in a rising market. Power plant conversion from coal to natural gas (UNG) is accelerating at a dramatic pace. Public utilities love ditching all the potential liabilities that come with coal. That leaves China as the remaining buyer, and their economy is slowing.

It all makes the current price of oil at $95 look a little rich. As with the last oil spike four years ago, this one is occurring in the face of a supply glut. Cushing, Oklahoma is awash in Texas tea, and the Strategic Petroleum Reserve stashed away in salt domes in Texas and Louisiana is at its maximum capacity of 727 million barrels. It is concerns about war with Iran, fanned by elections in both countries that have taken prices up from $77 since the fall.

My oil industry friends tell me this fear premium has added $30-$40 to the price of crude. This is why I have been advising readers to sell short oil price spikes to $110. The current run up isn?t going to take us to the $150 high that we saw in the last cycle. It is also why I am keeping oil companies with major onshore domestic assets in my long-term model portfolio, like Exxon Mobile (XOM) and Occidental Petroleum (OXY).

Energy independence is also making a huge contribution to the US jobs picture. According to energy guru, my old friend, Daniel Yergin (you must read his Pulitzer Prize winning book on oil, The Prize), energy has created 1.7 million jobs in the last 5 years, and will double that in the next three. It has also created $60 billion a year in new revenues from taxes and oil leases for the US Treasury. Ironic as it may seem, the job that pushes the headline unemployment rate down to the Fed?s vaunted and magical 6.5% target could be for a roustabout.

Tag Archive for: (OXY)

Can You Spot the Double Agent?

A Faberge Egg