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How to Profit In Government-Backed Oil Companies

By Matt Badiali, editor, S&A Resource Report
Thursday, January 10, 2008

Dark skies are looming for some of the world's biggest oil companies...

You see, from the 1930s to the 1970s, the major oil companies – the Shells, Exxons, and Texacos of the world – excelled at finding oil and delivering on promises to small, undeveloped countries. Most countries simply didn't have the financial clout or the technology to compete with the majors on a global scale... and the majors became some of the most valuable public companies on the planet.

But now, those roles – and power positions – are reversing. In just the past few years, we've seen countries use their oil assets like a baseball bat to cow the traditional majors. Venezuela, Nigeria, and Russia all recently renegotiated oil deals with major oil companies by threat (both subtle and overt). In some cases, assets have simply been "nationalized"... also known as "stealing."

That is a mounting problem for traditional major oil companies. I think the traditional majors are about to be eclipsed by a new hybrid – the state-owned oil company.

Don't get me wrong, some of these companies – like Mexico's PEMEX and Venezuela's PDVSA – are still backward, corrupt, and incompetent. Mexico, for instance, has managed to bungle production at Cantarell, the world's second-largest oilfield. However, a few state-backed companies emerged over the last decade as viable oil companies. The short list is Eni SpA of Italy, Total of France, Petrobras of Brazil, and StatoilHydro of Norway.

The national oil company combines the expertise and financial backing of a traditional major with the influence of a sovereign nation.

That works to the investor's benefit in several ways. First, countries like Nigeria and Venezuela will think twice about outright theft when it comes to the state-backed companies. We saw Bolivia's Evo Morales back down from a threat against Petrobras. I don't think he would have backed down from a traditional major like ConocoPhillips. But the wrath of Brazil's government is another matter entirely.

Second, state-run companies tend to get the best oil exploration rights on their home turf. For example, Brazil's oil ministry just cut several prized blocks adjacent to Petrobras' Tupi discovery out of a recent lease sale. You don't see the U.S. Congress cutting out leases in the Gulf of Mexico and handing them to ExxonMobil, that's for sure.

Third, these companies bring influence that extends far beyond oil and gas deals. That means, unlike independent majors, a state oil company can benefit from national trade negotiations.

Don't get me wrong... several of the "conventional" oil majors are still great investments. S&A Oil Report readers have made more than 50% in Chevron shares in just over a year, and I expect we'll double that in the next two or three. You can still find great values here.

But resource investors are crazy to ignore the likes of Petrobras and a few of the companies I mentioned above. We're up 135% in Petrobras in less than a year. Considering it's the world's finest deepwater oil outfit, the big gains aren't all that surprising.

The next time you're looking to add a Big Oil stock to your portfolio, ask yourself if it has the power of sovereignty on its side. It may mean the difference between 20% gain and 100% gain over the next few years.

Good investing,

Matt Badiali

Market Notes


A look at the companies reaching new 52-week lows this week is another eyeful of the trend we described in November... the outperformance of "the basics."

A few notable new lows reached on Wednesday: Citigroup (largest U.S. bank), Ford Motor (cars and trucks), Boeing (largest U.S. airplane producer), Whole Foods (expensive groceries), and Pool Corp (largest U.S. pool company).

What you won't see making new lows are shares of consumer staples conglomerate Colgate-Palmolive. Investors believe, that despite the American spending crunch, folks will still buy Colgate, Speed Stick, Ajax, Softsoap, and Irish Spring. Colgate-Palmolive is up 21% in the past four months.

As scores of spending-sensitive stocks plunge, it is the Colgate-Palmolives of the world that investors turn to. In addition to food and medical stocks, it is here investors are flocking in order to avoid the storm. Us? We still like gold.

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