Drill for Opportunities with Natural Gas

August 28, 2007

As of August 27, 2007, oil has been trading at a relatively high price of about $72/barrel for reasons explained in my last energy article, but natural gas was only trading for $5.59/mmbtu. To read about how the natural gas industry works here in the US along with charts/graphs about the supply and demand of natural gas over the years, click here for an article entitled “Understanding Natural Gas Markets”. As you can see from this graph from Charles Augustine’s Understanding Gas Market’s article, natural gas spot prices have declined from high of $12/mmbtu at the end of 2005 to their current level in the mid $5 range. Seems like quite a reversal is such a short amount of time, and probably a good time to look for stocks oversold in the natural gas industry.

Historic Natural Gas Prices
If you want to play the natural gas ticket while prices are relatively low, pay attention to Nabors Industries (NBR), the largest land based natural gas driller. Nabors was highlighted in an August 20 Barron’s article saying that there are many opportunities that exist from this highly profitable company with a forward PE of 7. Robert Marcin, the head of Defiance Asset Management in Conshohocken, Pa. states that “Nabors doesn’t need to hit the current 2008 consensus estimate of $4 a share for investors to do well. If Nabors makes $4, it’s a home-run stock. It could trade in the 50s. Even with $3 a share in earnings, Nabors could be a $40-to-$45 stock.” Nabors has over 600 land drilling rigs and has operations in the US, South America, Africa, the Middle East, Central America, and Canada. The natural gas industry will seek some short-term catalysts to help natural gas related companies and an improvement in the currently weak North American market, especially in Canada when in July it was reported that Canadian operations had its first major quarterly loss since the early ’90s.

If you’re looking for a producer of natural gas, Nabors would be the stock to look at, but if you believe in the pipeline business of petroleum and natural gas, then BJ Services Company (BJS) would be the stock to check out. BJ Services is near their two-year low and provide pressure pumping services for oil and natural gas companies. They help enhance the production of natural gas on land and offshore as well as maintain services to existing natural gas wells. BJS has a stimulation service that accounts for 69% of their 2006 pressure pumping revenue which uses different methods to deter any pipeline hindrances of the pathway of oil and natural gas.

Also if you look at the ratio of oil to natural gas over the last decade, it seems that oil trades at around a six times premium where the current commodity prices ($72 oil to $5.50 natural gas) stand at a 13:1 ratio. For the sake of Nabors and its competitors, hopefully natural gas prices should rebound to get closer to the six to seven times premium.

Historic Oil Prices


Energy Basics: Fluctuations in the Price of Oil

August 23, 2007

Hurricane Dean made its way through Mexico for the second time and has been been downgraded from a monstrous category 5 hurricane to a more manageable category 2. Many people in Texas, Oklahoma, and Mexico breathed a sigh of relief as none of us want to see another Katrina or Rita. Asides from the National Hurricane Center and the residents that would be affected by Dean , oil investors also keep a close eye on hurricanes. Hurricanes that go through the Gulf of Mexico may disrupt refining, exploration, or production of oil. Companies like Exxon (XOM), Valero (VLO), and British Petroleum (BP) all may be forced to cut production on a major scale which would lead to an increase in oil prices.

Straightforward supply and demand of oil does not necessarily dictate the price of oil which currently stands at $69.26 per barrel. An actual threat to oil supplies does not even need to exist, only the anticipation or concept of a threat happening is enough to bolster oil prices. The latest news headlines at CNN or Fox News have an effect on oil prices whether it’s about the health of the Iraq war, weather, or relations with Iran. Many energy analysts claim that the price of oil should be lower but about $20 of the current price is expectations of worldwide political turmoil.

Finally, when analyzing oil prices you cannot forget about the influence from the Organization of the Petroleum Exporting Countries (OPEC), an eleven nation oil cartel including Iran, Saudi Arabia, Kuwait, and Nigeria. The primary goal of OPEC is to negate unnecessary fluctuation in the price of oil while creating a level of oil stability. At the same time, OPEC makes sure to keep in the mind the financial interest of oil producing nations. Recently OPEC came out in saying that they would like to see oil not top $80/barrel, but would be very concerned if oil dropped below the $50 mark. Therefore, they believe they have created a foundation for oil to fluctuate in a $30 range, without disrupting worldwide economic growth, barring any extraordinary global events. Below is some of the key news that oil investors look to in deciding whether to buy or sell oil commodities.

Causes of an increase in oil prices:
– Hurricanes that disrupt the oil infrastructure or delays oil production in the Gulf of Mexico
– Terrorism (especially on US soil)
– Extremely hot summers and chilly winters
– Geopolitical influence
– Strong economic growth (with a careful eye in China & India)
– Kidnapping of oil workers in Nigeria

Causes of a drop in oil prices:
– Unexpected increases of oil stockpiles
– Warmer than expected winters
– Majors moves to alternative fuels
– Peace in the middle east
– Gasoline conservation

Hurricane Dean may have not caused the price of oil to spike in the recent week but bear in mind, hurricane season did start June 1, but it doesn’t end until November 30.

Basics: Diversification

August 20, 2007

Diversification means buying many types of unrelated stocks to reduce the risk of your portfolio going up in smoke. Some may wonder how this works. I will explore the statistics behind diversification. Let’s say there are N stocks that each have a chance of returning r% with a variance of s% and are statistically independent of each other. If you just buy one stock, your expected return will be r% with a variance of s%. If you purchase two stocks, your expected return will be r_new = 0.5 r_1 + 0.5 r_2 and the variance will be s_new = (0.5)^2 s_1 + (0.5)^2 s_2.   In the case that they have the same expected return and risk, your portfolio would have an expected return of r and a halved risk of s/2.  Just by buying two stocks instead of one, you reduce your risk by half.  Your If you purchased all N stocks, you would still have an expected return of r%, but the variance would be reduced to s/N%. The riskiness is measured by the variance. This is similar to experimental physics, when you do repeated experiments to reduce the error bars.

The key to this working is that the stocks should be totally unrelated. To accomplish this, one should buy stocks in different markets.

Saving Money: Lighting

August 19, 2007

One of the advertisements you see between streaming clips of the Live Earth is from Philips promoting compact fluorescent light (CFL) bulbs. How much does changing to this type of light bulb save the consumer? I will assume that electricity costs $0.15/kWh. That means if I run something that takes a kilowatt for one hour, it will cost me $0.15. The most abundant light bulbs around the house are 75W incandescent light bulbs, which can be replaced with 18 W CFL bulbs. Most likely you’ll have the lights on in the evening after you come back from work. If you’re one to turn off the lights when you leave the room, that leaves about 3 lights on at one time. So from 5 pm to 2 am, there will be about 3 lights on. 9 hours a day for 365 days a year. For a CFL bulb, 59 kWh are used a year compared with 246 kWh for an incandescent. That’s a savings of 187 kWh or $28 a year. That’s a decent savings. CFL bulbs also last longer than incandescents, so you also save time from changing them less.

CFL bulbs save money, but what are the drawbacks? CFLs used to be more expensive than incandescents, but with rebates they can be purchased for cheap. Those used to office fluorescents may dislike the warm-up period, hum and toggling the switch trying to turn it on. I’ve had problems with humming, but you can often keep switching them until you find one that doesn’t hum. You also should not use dimmers with CFLs since dimmers can cause humming. I’ve never had to toggle the switch back and forth to turn on a CFL. Most CFLs don’t need to warm-up. The only one that needs to warm-up is the one I use for the bathroom. That warm-up period is welcomed, because when you go to use the bathroom at night you don’t want to be blinded and brought out of your sleepy daze. As you get older, you’ll find yourself using the bathroom more at night. The quality of light from CFLs are good, but they do not contain as much red wavelengths as from incandescents. CFLs do not produce as much heat as incandescents, which make them more efficient at giving off light, but the one case in which a CFL can not replace an incandescent is when an incandescent is used for heat, such as some kid’s toys like shrinky dinks and those rotating lamp shades.

Don’t fluorescent lights contain mercury?

According to eartheasy.com, you can recycle your CFLs and the net mercury released is less than a incandescent , because mercury is released in power generation.

CFLs are awesome money-wise and environmentally. CFLs are the here and now, but solid-state lighting will be the future. That is for another time.

Keep Money in the Banks

August 17, 2007

The stock market lately has been rocky and extremely volatile. A lot of investors are panicking and realizing that the market cannot continue an upward trend forever. In the last month, investors have experienced a 10% correction in the Dow Jones from a July 19th high of 14,000 to the current value of 12,845.78. Today, the Dow Jones spiked down more than 300-points midday, only to close down about 15 points. Worries about the subprime mortgage’s economic effect, Countrywide Financial’s (CFC) credit crunch, and a slowdown of consumer spending have affected the mind set of those on Wall Street.

For those investors that can’t handle the financial roller coaster ride with plenty of bumps, the best thing to do would be to put your money in the bank and collect some interest. On the other hand, I believe that instead of putting your money into an actual bank down the street from wherever you live, invest it in bank stocks. Some bank stocks that pay handsome dividends include Bank of America (BAC) at 5.14%, Citigroup (C) at 4.54%, Wachovia (WB) at 4.69%, JP Morgan (JPM) at 3.34%, and Wells Fargo (WFC) @ 3.50%. On top of their dividends, a few of these stocks are at the lower end of their 52 week range. I personally own Wachovia and am a big fan of both Wachovia and Bank of America. These are stable companies that will pay off a dividend, will not fluctuate as much as other sectors, and may be able to weather another 5-10% downward correction in the market. If the economy/market turns sour sooner than later, you may likely see the Fed take decisive action and trim interest rates which will be a big boost for the banking sector.

Don’t be surprised with another 600-800 point drop in the market, but these bank stocks would be a good outlet to invest your money until you see more attractive prices in the market later this year.

Site Improvements

August 15, 2007

We now have a search bar on the right sidebar. Additionally, the stock tags are organized, so we can tag articles by symbol and keep the categories from being overwhelmed with different stocks.

Saving Money: Restaurants

August 10, 2007

Everyone loves eating out, but sometimes eating at restaurants gets expensive and can cut into your spending budget. With rising gasoline prices, it costs a lot just to drive to where you want to eat. If you aren’t too picky about where to eat, it is easy to dine at quality restaurants at discounted prices (while saving a bunch of money in the process) by following these tips:

1) Use restaurant.com to find restaurants in your area where you can purchase $25 dining certificates for only $10 or $10 dining certificates for $3. If you sign up for promotion notifications through their website, they will often e-mail coupons for 40%-60% off dining certificates. Therefore you can get $25 dining certificates for only $4-$6 and $10 dining certificates would cost a couple bucks. Be aware of the certificate stipulations that vary for every restaurant, like 18% gratuity added or minimum purchase amounts. So when you don’t know where you want to eat, try a few of the places offered through restaurant.com and save some money in the process.

2) Buy an Entertainment Book that contains many great coupons for your particular area, and you can view coupons on their website to determine if you could make use of any of them before purchasing a book. Aside from restaurants, there are also very good coupons for movie theaters, attractions, car washes, and groceries. If you would like to use the Entertainment Book for the rest of 2007, available 2007 Entertainment Books are only $9.99. The 2008 entertainment books are now on sale and cost between $27 and $47 depending on where you live in the US. After a few coupons are used, the Entertainment Book will literally pay for itself. Great book to use when taking anyone out, especially your boyfriend or girlfriend.

Note: make sure to check Ebay and you may get the Entertainment Books for cheaper compared to the Entertainment Book site

3) Make use of your local websites that offer discounts. I live in San Diego and use San Diego Reader or SanDiegan for some good deals on food, recreation, or attractions.

4) Check reviews on a restaurant before you decide to eat there. Regardless of how much you pay for the meal, you don’t want to go to restaurants that don’t serve any good food. I recommend using Yelp to get a consensus on whether you should try it or not. Yelp provides restaurant reviews from users and provides specific information about restaurant along with a map of nearby dining locations.

The more money that can be saved, the more you will have to invest so keep an eye out on more ways to save here at Happyinvestor!