Perhaps the two are inextricably linked; perhaps it was just coincidence. Either way, when prices for crude oil started to descend from incredible peaks last summer, it seemed just a matter of time before the rest of the economy followed suit. Conversely, crude prices may provide the vehicle for the economy to reacquire some color, after the paleness it displayed over the winter.
Any close observer who sees this link must take at least some cheer from the projections of some oil industry experts. The site known as www.oil-price.net, for example, notes the mad fluctuations in oil prices from a positively Alpine height of $147.27 to a gully of $32.41 in only 52 weeks, and adds, while it does not look for petroleum to live that high off the hog anytime soon, the site looks for prices to reach $83 a barrel within a year from now.
The official energy statistician for the U.S. government, however, is not so kind. The Energy Information Administration (EIA) notes that the price of West Texas Intermediate (WTI) crude oil is expected to average near $70 per barrel through the second half of 2009, an increase of about $18 compared with the average for the first half of the year. The WTI spot price is projected to rise slowly as economic conditions improve, and to average about $72 per barrel in 2010. In sum, there is a variety of opinions and theory on where black gold is headed, but the bottom line is that America has to find a way to rid itself of the yoke of foreign oil, on which she has been dependent on for many years.
On this subject, geologist and oil industry giant T. Boone Pickens may have hit on something when he inaugurated a campaign to rally support for the natural gas industry, pegging the gas as the wave of the future. With natural gas being so plentiful in just this country, it is relatively cheap, and thus, already finding acceptance. Auto makers such as Honda are already working on a vehicle powered exclusively by natural gas and hope to make such conveyances commonplace within a matter of years.
The EIA site projects, worldwide, total natural gas consumption will increase by an average of 1.6% per year, to 153 trillion cubic feet in 2030. With world oil prices assumed to return to previous high levels after 2012 and remain high through the end of the projection, consumers will opt for the comparatively less expensive natural gas for their energy needs whenever possible. In addition, because natural gas produces less carbon dioxide when it is burned than does either coal or petroleum, governments implementing national or regional plans to reduce greenhouse gas emissions may encourage its use to displace other fossil fuels.
Certainly, things are not entirely rosy for many of the large-cap Oil Companies, whose second-quarter earnings came out at the end of July. Chevron Corporation (NYSE: CVX) for one, said it made $1.75 billion ($0.87 per share - diluted) in the three months ending in June, compared with $5.98 billion ($2.90 per share - diluted) in the same quarter last year. The decline in both comparative periods was primarily due to lower prices for refined products, crude oil and natural gas.
Consider also ConocoPhillips, (NYSE: COP) whose Q2 profit fell 76%, though it still topped $1 billion as the company managed to boost production and lower costs, even as its refining business lost money.
COP said net income for the three months ended June 30 dropped to $1.3 billion, or 87 cents a share, from $5.4 billion, or $3.50 a share in the year-ago period. The Houston-based oil giant was expected to earn 85 cents a share, according to a survey of Wall Street analysts by FactSet Research.
While the large-caps are primarily working on oil extraction, small-caps are more focused on exploration and finding the next “big” oil field. With this in mind, an up-and-comer Austin-based Company known as North American Energy Resources Inc. (OTCBB: NAEY) may find itself in that realm. In a situation involving either luck, or hard work aimed at making one’s own luck, NAEY recently drilled on a reserve in Oklahoma searching for natural gas, only to find thousands of barrels of recoverable oil that had been abandoned in the 1970s, when bringing it to surface would not have been economically feasible for the property’s then-operator. The site had been in existence since the Oklahoma oil boom of the 1920s, and may prove the catalyst behind a boom for this company.
NAEY will target a minimum of 60 well completions per year with a future undiscounted net income that could exceed $60,000,000 at current oil and gas prices. NAEY’s goal is to complete a minimum of 120 wells over a two-year period, maximize lease acquisition around its pipeline and reach a valuation goal of $72,000,000 to $144,000,000. Land-wise, it currently leases 900 acres and plans to acquire an additional 1,400 acres before the leaves turn this year.
North American Energy Resources has become something of a bulldog for the Pickens Plan to boost the perception of natural gas as an alternative energy source. The true value of these developments to North American Energy Resources lies in the fact that the company owns a pipeline that is in very close proximity to their properties. The pipeline allows NAEY to quickly and cost-effectively get their product from the field to the refinery in the shortest amount of time. Pickens’ Plan is all about efficiency and conservation, which are also key focuses for North American Energy Resources.
Time waits for no investor, and neither likely will the (relative) bargain price at which NAEY finds itself. Early August saw the stock languishing at 56 cents a share, well off its 52-week lows of six cents but appreciably below its peak of $1.65. This stock can be had for very little, and the prospect of watching it grow with the twin fortunes of the oil and natural gas industries may prove too exciting to just sit and watch on the sidelines.
While opinions are mixed on future prices of oil, its importance is still undeniable to everyone following the black gold. The large caps have been hit hard by price fluctuations in 2009, presenting investors with opportunities in small-caps with aggressive growth strategies.
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