Friday, June 27, 2008

What's Up Today: BPT, And a Few other Stocks

Despite the Dow moving into cyclical bear market territory today (closing at 11,346.51) and the decline of the S&P 500 and Nasdaq along with it, 15 of the 21 positions in my enterprising portfolio (my main stock portfolio; I am in the process of consolidating this into a more concentrated portfolio) are up today. I'm still down from my purchase price on many of these, especially the ones I bought last year, when I was still rigidly adhering to Joel Greenblatt's Magic Formula investing system (more on that in a later post), but the lack of correlation between this portfolio and the broader market indexes is partly a result of changes in my investment methodology over the last six months. Specifically, I began paying close attention to relevant macro trends for various stocks, and limiting my investments to those positioned to benefit from those trends. Some examples of those macro trends include the secular bull markets in energy, metals, agriculture, and the related infrastructure boom overseas, particularly in China.

One of the 15 stocks that is up today made a new all-time high, BP Prudhoe Bay Royalty Trust (BPT). Shares of this trust had been flirting with the triple-digit mark for the last few months, but finally closed above $100 per share today at $100.77. Despite the 50% total return for this trust over the last year, its stock still looks inexpensive, trading at only about 9x next year's estimated earnings. This is true, incidentally, of two other, radically different oil stocks I own: the integrated mega cap major ExxonMobil (XOM) and the small cap E&P Vaalco Energy (EGY) -- both trade with enterprise values at similarly low multiples to next year's estimated earnings. This demonstrates a point I and others have made recently, that despite the huge run-up in oil prices over the last year, the current high oil prices haven't been priced into many oil stocks yet. Perhaps this is because the biggest oil bulls have been investing in the commodity itself, via ETFs, and perhaps it's because many market participants believe oil will soon revert back to $70 or $80 per barrel.

Depletion is a concern for all American royalty trusts, of course, particularly one such as BPT that derives its royalties from a field as old as Prudhoe Bay. For detailed analysis and predictions on BPT's production and depletion rates, I recommend the occasional posts by "RoundRobinJack" on BPT's Yahoo! Finance message board. Here is a link to his latest Production/Distribution Update. More broadly, this man's posts demonstrate that although most comments on Yahoo! Finance message boards may be uninformed cheer leading, bashing, or just plain spam, occasionally you find an obviously knowledgeable poster whose comments are well worth reading. Just as with investing, sometimes you have to sift through the junk bin before finding something of value.

Of these three oil stocks, I currently have a GTC limit sell order on XOM. As Daniel Wahl has pointed out in correspondence with me, and in a post on his blog, integrated majors such as XOM have a few strikes against them, limiting their ability to benefit from the oil boom:
  • Refining components. While the integrated majors may benefit on the exploration and production side of the business, their exposure to refining (where rising crude prices squeeze "crack spreads", i.e., profit margins on refined products) remains a liability.
  • Their enormous size. This makes it difficult for new oil and gas discoveries to 'move the needle' in expanding the company's reserves.
  • Their need (again, because of their size) to expand exploration and production in more politically unstable parts of the world, where their assets are subject to expropriation (e.g., as was the case with Exxon in Venezuela last year).
Despite these factors, I still think XOM is a value at these prices will probably do well over the next year. Nevertheless, I agree that there are investment opportunities in the sector with more potential, and the ideal sort of company to find would be an attractively priced small cap E&P with proven resources in a politically stable country such as the U.S. or Canada.

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