A Barrel of Reality

BP, formerly British Petroleum, has been making headlines for weeks with its outrageous 35,000+ barrel per day ocean-based spill. With President Obama calling for revenge (at least publicly), and congressmen berating BP executives while vainly attempting to maneuver them into admitting guilt, some say that the offshore oil market is finished. Others add that the rise of alternative energy vehicles is now assured. Still others say that BP is a great buy. This article is a dose of reality all around.

I am a big fan of alternative energy. Wind and solar power have come of age, and can successfully compete with traditional sources like coal and hydroelectric power for electricity generation. Alternative energy vehicles, however, are simply not at the same level.

Despite all the hype about alternative energy vehicles, how many recharging stations do you actually see on your way home from work? How many people do you know who run electric vehicles for personal use (not just for corporate image)? Major alternatives to electric, such as fuel-cell cars, have been “in the works” and “soon affordable” since I visited Ballard Power’s (BLDP) office 11 years ago.

Although fuel cell and electric vehicles hold great promise, they simply aren't ready. No one wants to wait 20 minutes to "refuel" their car. No one wants a low-cost commuter vehicle that goes 35 miles per hour. Nor does anyone want to pay a year’s salary for a car that goes the same speed as their existing car.

Like personal computers, alternative energy vehicles will truly take off once cost and functionality reach reasonable levels, and once the infrastructure to maintain them is in place. Until then, oil and its producers maintain a bright future.

As for BP, should you buy or sell? Although BP looks tempting at these levels, I should remind everyone that the inglorious well is still leaking thousands of barrels per day. Until it’s actually capped, my money is going into more reliable opportunities; like, for example, this disaster's beneficiaries, Chevron (CVX) and ConocoPhillips (COP).
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“Already those who have seen this new model are acclaiming it the finest car of any type yet produced for city and suburban use. You, too, will be delighted with it.”
Advertisement for the Detroit Electric Car Company, 1920.

Two Stocks I Like - Oil and Gas Industry

When it comes to stocks, I’m of the Peter Lynch School, which says that you shouldn’t purchase a stock unless you can, a) rationalize your purchase in few sentences, and b) draw what the company does with a crayon. These companies fit the bill.

I have no idea whether these stocks will go up or down in the next 6 hours, days, or weeks, and don’t know anyone who does. My intention is to hold them (I own both) until at least the peak of the next market cycle, or until the company proves to be something other than what I thought (for example, the dreaded words, “accounting irregularities.”)

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Tidewater (TDW) – Tidewater is an offshore oil and gas drilling support-company that owns a fleet including 126 new vessels, making it one of the youngest fleets in the industry. Its ships have low downtime and an excellent safety record. The company has almost no debt, great return on equity, and the stock price is cheap – single digit P/E and close to book value. The company has been buying back shares.

Because Tidewater’s worldwide fleet is mobile, they can sail to wherever the work is. This company is also a manly man stock, with photos of oceangoing vessels all over the annual reports. While this latter point isn’t actually a reason to buy, I enjoy it nonetheless.

Barack Obama recently expressed an interest to expand offshore drilling in the United States: this is not a sufficient reason to buy Tidewater. Buy a stock because the company is great -- not because of a politician, the weather, interest rates, or any other transitory reason.

TDW Statistics (as of writing):
Price $46.81
P/E 6.67
Return on Equity 16.75%
Dividend Yield 2.12%

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Chevron (CVX) – one of the world’s largest and most recognizable energy companies. Chevron owns assets worldwide including Australian natural gas, Canadian oil sands, offshore sites in Brazil, and sites in Nigeria, Kazakhstan, and Tahiti, amongst others.

Recently, Chevron announced that its earnings had declined due to losses from weak refining prices in 2009: something I believe is unlikely to be repeated in the foreseeable future. Chevron’s debt level is low (lower than most energy companies), it has actively been buying back shares, the stock is reasonably priced, and its return on equity is excellent. In addition, its international operations help prevent currency shock.

CVX Statistics (as of writing):
Price $72.80
P/E 11.83
Return on Equity 13.86%
Dividend Yield 3.69%

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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.