Even though demand is low and inventories are high, the price of oil (NYSE: USO) remains at an elevated level above where it should be, based on supply and demand factors from the market. A significant part of this is due to tension in the Middle East oil-exporting region, known as the “Syria premium.” According to Dr. Kent Moors, an energy expert, oil prices will remain high long after the conflict in Syria has calmed down.
While only time will tell if the assertion of Dr. Moors is correct, it is undeniable that the share prices for oil companies have been strong for reasons other than the basics of supply and demand. Investors are looking for safe assets, and oil companies, both large and small, that represent very secure holdings. After all, when was the last time you heard of an oil company filing for bankruptcy?
But is there another element to the safety and security aspects of oil companies?
The Attractiveness of North American Oil
Repsol (PINK: RPYY), the Spanish oil giant, is reported by The Wall Street Journal to be shopping for North American energy assets. Looking to spend from 5 to $10 billion, Repsol wants to secure its base of oil and natural gas reserves. For that, it is looking at assets in the United States and Canada.
A long line of investors are ahead of Repsol in buying shares of North American oil and natural gas companies.
Warren Buffett, considered by many to be the greatest investor ever, is a major shareholder of ConocoPhillips (NYSE: COP) and Suncor Energy (NYSE: SU). Based in Calgary, Suncor heads up a wide range of Canadian oil and gas entities, ranging from prominent blue chips to promising small caps like Americas Petrogas (TSX: BOE) and Octagon 88 (OCTBB: OCTX).
Operating from its Houston, Texas offices, ConocoPhillips, is up more than 20% for 2013. ExxonMobil (NYSE: XOM), the world’s biggest and also calling Houston home, is also up for the year. It is not just Texas, however, as EQT Midstream Partners (NYSE: EQT), is a a small-cap oil and natural gas from Pittsburgh that is up more than 60% for 2013.
A Rising Tide Raises All Ships
While the “Syria premium” makes North America oil and natural gas firms more valuable, all companies in the energy sector will benefit from it. That is due to the oil market pretty much moving as one around the world. If the price of oil rises, the share price for an oil and natural gas will go up, no matter where it is headquartered.
As the global economy is still very shaky in its recovery from the Great Recession, investors are more attracted to stable, secure investments. That has always been oil companies. While the share prices certainly rise and fall (as do all stocks), oil and natural gas entities have proven themselves to be very secure. That is shown by the low betas for major oil firms such ExxonMobil (0.53), almost half that of the average of 1 for the stock market as a whole.
Stocks like these, less volatile, attract long-term investors such as pension funds and mutual funds. These will hang on the shares, being long-term investors. As a result, there is not the selling pressure that drives down the stock prices of other stocks. From that, the “Syria premium” could remain for oil company share prices long after the conflict has been resolved.
What are your thoughts on oil companies and other energy sector investments?
Jonathan Yates is a financial writer with degrees from Harvard, Johns Hopkins and Georgetown University Law Center. While much of his career was spent working for Members of Congress on Capitol Hill, he was also General Counsel for a publicly traded corporation; and worked in the research department of a brokerage house.
krantcents says
I think it is a great way to hedge inflation and gas prices.