Can Russia Rescue the West Again? By Andrew Gordon 
If you were running an oil company, what would your number one priority be? Jacking up production, right? I mean, prices have just shot up from $50 to $120. And you know that whatever you produce, you’ll sell. Can it get any simpler than that? Whatever it takes, push product out. Now, we may not be dealing with a bunch of Einsteins at the head of these oil majors, but they’re not dopes either. They understand what’s going on. So, why is it that when ExxonMobil, Royal Dutch Shell, BP, and ConocoPhillips all reported in the last two weeks, each and every one of them said the same thing. Profits are up on price increases. And volume is flat. Let me repeat that. VOLUME IS FLAT. What the heck is going on? Take these companies with market cap’s of several hundred billion dollars ... the latest drilling technologies ... thousands of acres ... billions of barrels of proven reserves ... tens of billions more of unproven reserves – add it all up and they can’t produce more oil this quarter than they did last quarter or the quarter before? Have these companies gone OPEC on us? I mean, we know that OPEC keeps production just low enough to keep prices high. But they only provide about 40% of the world’s oil. What’s the excuse for these private oil majors? Have they also found it in their interests to keep a lid on production? (This wouldn’t be the first time we’ve seen a manufactured shortage to hike prices.) I almost wish there were an unholy conspiracy between OPEC and the other oil producers. If there were such a thing, it might mean with a little arm-twisting, we could get non-OPEC producers to push up production. But, alas, there is no conspiracy. There is something else ... something much more ominous... If we were talking about food, I’d say there’s a worldwide famine brewing. But it’s oil, which isn’t quite as brutal as a famine. People have to eat. But do they have to drive? No. But a worldwide shortage of oil is knocking on the door. Right now, supplies are tight. But they are more or less in balance ... with admittedly no excess capacity to spare. It’s not going to last. Global oil demand is about to leave oil supply in the dust. Shell’s production fell six percent year-on-year. BP’s fell two percent. ExxonMobil’s fell 10 percent. According to Credit Suisse, overall production will fall two percent this year from last. I believe that underestimates the slide. And while OPEC – being OPEC – has no quarrel with the soaring price of oil, the fact is, even OPEC countries (except for Saudi Arabia) can’t produce more than what they are now. Saudi Arabia is producing 12.5 million bpd (barrels per day). It has plans to increase that amount to 15 million. Or should I say “had” plans. The Saudi government has put those expansion plans on hold. It doesn’t want to take the risk of expanding into the teeth of a global recession. OPEC as a whole plans to increase oil production by five million bpd. That won’t be enough. Global demand should increase by 11.5 million bpd by 2030. Russia came to our rescue in 1999 when it finally opened up its fields to Western participation. Russian production rose by four million bpd from 1996 to last year. During the same period, Saudi Arabia’s production increased by 600,000 bpd. Can any of the non-OPEC countries come to our rescue once again? Russia won’t. It’s too busy renationalizing its oil and gas industry. Mexico? Nope. Their Cantarell field is getting long in the tooth. England? Norway? No, their North Sea production is winding down. Venezuela? Don’t make me laugh. Mr. Hugo Chavez is more intent on using his petro-profits as a tool of foreign policy, not plowing them back into oil production to help lower oil prices for the U.S. and its friends. And the oil majors can’t help us because they can’t help themselves. Every time they think they’re getting access to a big field bursting with oil, something happens. Expropriation ... terrorist acts ... renationalization... But the most insidious thing of all is the one-sided production-sharing contracts which favor the home countries as prices rise. They’re the ones now getting windfall profits as the price of oil goes higher, not the independent oil majors.
In the cornucopia of oil reserves, these companies are getting the scraps. They’re wandering farther and farther into the remote inhospitable areas of the world to do their exploring and production. It’s gotten so bad that one oil analyst estimates that BP and Shell require crude to remain at least in the low $70’s to be able to pay for its capital costs and dividends. The independent oil companies are on the wrong side of history. Just because nobody is talking about it doesn’t mean it’s not happening. The time to invest in them have come and gone. It’s time to adopt the motto of Gorbachev, Khadafy, and Shaq: “If you can’t beat them, then join them.” Power in the oil industry has shifted from the independent oil majors to the state-owned or previously state-owned oil enterprises. If you want to make money off of oil, that’s where you should invest. Good Trading, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com. [Ed. Note: With a bear market looming, it’s more important than ever to select safe investments that produce monthly dividend income. Click here to learn about Andy Gordon's INCOME service that selects the best dividend-paying stocks available.] The Best That Money Can Buy? Not By a Long Shot! By Andrew Gordon We’re in the middle of a recession and there are a ton of expensive stocks on the market. Are they worth it? I just did a search of companies with price-to-earnings (P/E) ratios of over 100. These stocks are pricey. Buying reasonably priced companies in the best of times can be tricky. And these aren’t the best of times. So why are there 153 companies with a P/E ratio of over 100 (according to the search I did on my Yahoo stock screener)? I didn’t go through every one of these companies. But going through about half of them, I found that just a few earned their high P/E ratios because of strong growth fundamentals. Usually, it was because earnings have fallen faster than the price. eBay (EBAY) is a good example. Its earnings have dropped 65% over the past 12 months. But its price has only dropped 8 percent from a year ago. Its P/E ratio is 99. eBay has gotten more expensive from having a bad year, not a good year. UPS is another super-expensive stock. Its P/E ratio is 173. Its earnings have gone down 89 percent over the last year. During the same period, its price has actually increased by 3.4 percent. It’s true that UPS shares look overbought, but why even buy this stock on the dip? It’s not only U.S. stocks that are getting a rich valuation from earnings falling faster than share prices. Deutsche Telecom (DT) from Germany followed this same pattern. DT’s earnings dropped 82 percent this past year. Its P/E ratio is 91. Telefonica de Argentina (TAR) is another overseas example. With a P/E ratio of 91, its earnings dropped 67 percent over the past 12 months. Do any of these highly priced companies actually deserve their rich valuation? There are rare exceptions to this pattern and one comes from overseas. Baidu is China’s Google. Its P/E ratio is 127. But it also grew its earnings over the past year by 95 percent. Phoenix-based First Solar’s (FSLR) P/E ratio is 110. But its earnings grew over 1,000 percent last year. Investing in stocks with P/Es of over 100 has always been a risky proposition. It’s hard to sustain such a high valuation for long. Google was one of the few that managed to do it. But even mighty Google’s valuation has fallen back to earth. Its P/E is now just over 40. At one time, you could have argued that Google’s ultra-fast growth in revenue and earnings warranted such a high P/E ratio. With very few exceptions, the current crop of super-expensive companies can make no such claim. INTERNAL ENDORSEMENT Recession in 2008?
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