Three Huge Oil Stories from the Past Two Weeks
These past two weeks have been incredibly hectic for oil companies. The biggest oil players all jockeyed for remaining oil scraps - in three separate locations. I'd be remiss not to mention these oil stories even if there weren't any small cap investment implications - but there are, and I'll get to them in a minute.
To be brief:
On March 4, Exxon (NYSE: XOM), Shell (NYSE: RDS) and BP PLC (NYSE: BP) finalized contracts with the Iraqi government to start bringing oil to market from Iraq's massive Rumaila oil fields - the world's third largest. The deal is worth a total of nearly $5 billion per year for these three companies alone.
Then on March 11 (last Thursday), British oil giant BP completed a deal that will give the company access to some of Brazil's massive offshore oil fields. These fields were discovered in 2007, and represent some 5 billion to 8 billion barrels of oil. That’s a boatload of oil. In fact, it's the biggest oil discovery in the western hemisphere since 1976. And combined with the growth in Colombia’s oil industry over the last decade, the Brazilian oil fields help to solidify Latin America as a major global player for the indefinite future.
And then just this morning, Shell announced another significant offshore oil find in the eastern portion of the Gulf of Mexico. It's in deep water - over 7,000 feet below the surface. Exact estimates are still forthcoming, but Shell calls it an "excellent reservoir."
These stories flew under the radar - but they're big news in an industry that's best known for being slow-moving. For instance, Exxon typically only makes big deals once a decade. But this past year has been different. They bought XTO Energy (NYSE: XTO) earlier this year for $31 billion. It was Exxon’s biggest merger since the company bought Mobil Corporation back in 1999 for $75 billion.
***To look at oil and gas prices, you wouldn't know that the world's biggest oil companies were elbowing each other in the ribs for the privilege of scraping the barrel. Crude oil prices just fell below $82 at the same time that gasoline prices rose to an average of $3.10 in the United States. They're both well off their highs from the summer of 2007.
But clearly these major players see oil prices rising in the future. Otherwise, they wouldn’t be jockeying to establish long-term oil supplies, especially at extremely favorable terms like the ones just agreed to in Iraq. I expect this type of wrangling to continue until the last drop of oil oozes from wherever BP, Exxon or Shell manage to find it.
***Like I said, the industry momentum is causing small-cap stocks to move too. We’ve discussed Houston American Energy (NASDAQ: HUSA) a few times here in Small Cap Investor Daily. Over the last two weeks this is one oil exploration company that has seen shares rally. They are up 26% since February 25th on the back of these oil developments. In fact, the stock has been rocketing higher for the last year, gaining 550% and smashing the broader stock market’s performance. They say a rising tide lifts all boats, and this exploration company is no exception.
The $437 million market cap company explores in the U.S. Gulf Coast and Colombia. In the third quarter, revenue increased 2.3% to $2.4 million while net income decreased 46% to $430,000. Margins came under pressure, as the exploration company’s gross margin fell to 55% from 66% and its operating margin declined to 5.6% from 34%. But despite the pause in growth, the company still shows $4.7 million in cash on the balance sheet and no debt.
With a price-to-book ratio of 20 and a price-to-projected-earnings ratio of 95, the stock seems overvalued. But this stock has fooled us before, rising when we thought there was no upside left. Institutional investors such as Columbia Wanger Asset Management purchased 2.4 million shares in the fourth quarter. That means the group owns over 8% of the float.
Like I said, a rising tide lifts all boats. And there is clearly institutional buying behind the recent move higher in oil stocks. Houston American is one winner of late, but there are more companies out there.
***We're about to unveil a special offer for Energy World Profits - my energy research advisory service. For Small Cap Investor Daily subscribers we're going to give you six free months to try Energy World Profits. If you think oil makes any sense at $82 a barrel then this service probably isn't for you. But if you think, like I do, that $82 a barrel is a short-lived fantasy then I encourage you to take a look. Check your inbox on Monday for the full story. Have a great weekend.
