Oil Fund Manager sees 60 Dollar Oil in 2010, 70 in 2011

Saturday, October 10, 2009

In this week`s Cover, Barron's highlights several oil giants worth thinking about including XOM, TOT, BP and PBR:

1) ExxonMobil (XOM) is the priciest of this list but, cash-rich, is also the most likely to raise its dividend. It has low reserve-replacement costs and a sharp, conservative management team. Its shares have been the most stable of the big energy firms, losing just 6% over the past 12 months. Speculation has been growing as to whether Exxon will make an acquisition, possibly for BG Group (BRGYY.PK) or for all or part of Royal Dutch Shell (RDS.A).

2) Total's (TOT) outlook has improved thanks to the appeal of liquefied natural gas, especially outside the U.S. The company's nat-gas reserves are expected to be bolstered significantly by a recent agreement with Russia's Gazprom. 2008 production was hurt by unexpected shutdowns in Africa and the North Sea. However, European margins were up 88% in Q3, and with low-cost African production and rapid Middle East expansion, Total should do well if oil holds steady or rises. S&P has a 12-month target price of $92 vs. Friday's $47.42

3) BP (BP) earnings will likely take a short-run hit from low crude prices from in Russia, where a joint venture contributes around 25% of production. In the meantime, BP has been working on expanding its nat-gas operations. CFO Byron Grote says BP's $3.36-a-year dividend isn't at risk if oil stays in the 40s or higher.

4) Petrobras (PBR) is a smaller player and a more speculative buy than the other firms on this list. It has made some interesting energy discoveries, but not all can be exploited profitably at current petroleum prices. The Brazilian government, which owns around a third of Petrobras, has encouraged the company to return more profits as dividends, so its 3.7% yield could rise slightly this year. Deutsche Bank cut its target to $35 last month, but that's still a gain from Friday's $24.58.

The story is less positive for other big players, including Royal Dutch Shell, ConocoPhillips (COP) and Chevron (CVX). So while long-term industry prospects are positive, investors will have to be picky to find the winning companies.

Tim Guinness, of the Guinness Atkinson Global Energy Fund, calls all the integrated oil stocks a 'screaming buy' with over 50% upside. He assumes petroleum prices will average $60 in 2010 and $70 in 2011.

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