Market Analysis

Oil on Canvas: Today’s Energy Landscape

High oil prices translate to great investment opportunities.

Story Highlights:

  • Energy prices are at record highs as oil reached $104 a barrel today.
  • But Energy companies are using huge revenues to explore for and produce more oil and gas, expand refining capacity, fund unconventional resource development, and merge with competitors.
  • Both pure Energy sector firms and fringe industries supporting the boom should prosper in this environment.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)_______________________________________________________________________

Today crude oil prices hit a record $104 a barrel, and $100 oil (or close to it) is probably here to stay. It's nothing to fear—in fact, it can be a great investing opportunity.

Oil Rises above $104 to Record on OPEC Output, Venezuela Tanks
By Mark Shenk,

Rising energy costs have worried folks for some time now. And today's record price will undoubtedly bring rampant speculation, yet again, the world is ending and other such dire predictions. We've outlined why we think these worries are mostly misplaced. For more, read "A Hundred Bucks a Barrel," 1/3/2008.

But investors should take a deep breath, back away, thoughtfully rub their chins, and contemplate the beauty of the current Energy landscape—Energy companies are raking in record profits. You've probably heard the press spin this as an outrage, possibly illegal, and sorely needing remediation. (May we suggest a band of jolly woodsmen in green tights?) But what most people forget is higher prices (and record profits) can support successful investment strategies.

Contrary to popular opinion, record profits aren't being wasted on luxury cruises or fine wines (at least not mostly)—the big players are using huge revenues to explore for and produce more oil and gas, expand refining capacity, merge with competitors, and recover previously impractical reserves in the deep ocean, tar sands of Canada, and oil shale of Texas. And don't forget, those profits also fuel exploration for more oil as well as development of alternative energy sources.

Exxon Sees '08 Capital Spending up 20 percent
By Staff, Reuters

Instead of fretting high energy prices, focus on how you can take advantage of the current environment. Maintaining a fully stocked position in the Energy sector is a no-brainer—but also consider related industries supplying steel for infrastructure build-outs or those providing specialized heavy machinery and transportation services. These industries will benefit from huge national oil companies or vertically integrated behemoths like Exxon investing in new exploration and production projects and expanding refining capacity.

Additionally, deepwater drillers are seeing a boom in business as higher prices boost profit margins and make previously impractical projects feasible—a good example is the recent deep ocean discovery of the massive Tupi field off the Brazilian coast. Already sky-high demand for deepwater drilling has created a three-year waiting list for drillships commanding over $500,000 a day to operate.

Offshore Oil Discovery Could Help Make Brazil Major Petroleum Exporter
By Staff, The AP via International Herald Tribune

Moreover, high prices are opening new markets for previously unsustainable operations extracting oil from tar sands and oil shale. Companies specializing in unconventional resource development will profit as reserves like the famed Texas Barnett Shale, possibly the largest onshore US natural gas field, are increasingly exploited. Similarly, the growing development of Alberta's oil sands (production expected to almost triple by 2020) will help bolster unconventional resource development companies' earnings.

Finally, expect giant oilfield-services companies to consolidate as demand for drilling rigs and other heavy machinery outstrips supply. Investing in merging companies is often profitable for investors, as the offered share acquisition price is marked at a premium.

So, instead of worrying over oil, you should determine how high energy prices can benefit your portfolio. Make the right investment bets and you might find it easier to pay an extra dollar at the pump—the current energy landscape is ripe with opportunity.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.