Monday, August 4, 2008

Blood in the Streets

The chart to the left is a comparison of the price of Cross Timbers (XTO), one of the largest natural gas developers in the nation, and the price of oil. I'm using the Exchange Traded Fund (ETF) strangely enough called OIL. As you can see the price decline in OIL this year has been about 35% vs. a decline of 75% for XTO. A closer look at the price of XTO has it just about flat for the last 12 months, while oil is up about 75% for the same period.

Clearly, oil got ahead of itself and has backed off in terms of price, but the fall in natural gas stocks is a bit more puzzling to me. All the talk about alternative energy has natural gas at its core. We have huge deposits of natural gas in the United States so we will not have to import any natural gas to meet our needs. Is the greater decline in XTO an example of the markets throwing out the baby with the bath water? It is companies like XTO that will drill for the natural gas that we will need for energy independence.

I asked my self, is it true that we are not drilling in the United States to meet our needs from the resources we have here in America? The answer, based on exporting $750 billion dollars a year, some to foreign government that are not our friend, is yes. Is it also true that the developing countries of the world are demanding more “carbon based fuels”? The answer to that question is yes. Is it possible that the slowdown in the United States will spread to other nations both developed and developing and take some of the pressure of the oil inventory for the short run? The answer is yes.

Then I had to ask myself the final two questions. First, at some point in time when the global economies start growing again some time in the future, will oil and natural gas prices be higher than they are today? Yes. Second, is now a good time to either add to or start a new position in the natural gas stocks like XTO? I believe the answer is an unequivocal yes. Could these stocks go lower? Possibly, but for the long-term investor adding or entering into these stocks at these levels is a great bargain.

Someone once said that the best time to buy stocks was when there was “Blood in the Streets”. The decline in these stocks clearly has been a “Blood Bath” and nobody wants to talk about buying them at this level. I expect these companies to report great earnings and at these levels be trading at 6 to 8 times earnings or less. For the investor that has a long view now is the time to start committing capital. If you have $25,000 dollars, you want to invest in this assets class pick several stocks and commit 25% now, 25% in 30 days and 25% in 90 days and the last 25% of your money by year-end. I fully expect some short-term rallies and then retracement to higher lows. Watch for these higher lows as a possible signal to add to you positions.

Dan Perkins

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