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$70-a-barrel oil likely to boost drilling firms

The Baltimore Sun

Energy may be a wild ride for investors, but it could be the vehicle of choice.

Even swooning credit and stock markets can't overshadow $70-a-barrel crude prices or emerging markets that can't seem to consume enough oil. Only a global recession could potentially modify the scenario.

In the quest for more oil and natural gas, the giant drilling companies lead the way.

For example, Diamond Offshore Drilling Inc., with 43 drilling rigs operating in the United States and internationally, has seen its stock price soar this year. Ten of its rigs operate in challenging deep-water environments that receive lucrative contracts.

Sophisticated deep-water drillers Transocean Inc. and GlobalSantaFe Corp. plan to merge by year-end in a cash and stock deal that will create an even more imposing company in the competition for tough international projects.

"There's been a realization that there must be more capital spending to get oil and gas out of the ground because supply can't keep up with global demand," said Stewart Glickman, an analyst who covers oil-field drillers and services for Standard & Poor's Corp. in New York. "Demand is being driven by emerging markets, and China in particular, with oil and gas supply struggling to keep pace."

Energy stocks are up about 17 percent this year, according to the S&P; 500 sector scorecard.

"Strong oil prices had buoyed energy equities throughout most of 2007 until broader market hysteria kicked in a few weeks ago," said Collin Gerry, energy analyst with Raymond James Financial in St. Petersburg, Fla.

"While energy did pull back, it wasn't to the extent of some other market areas because its main driver remains $70-a-barrel oil."

He is bullish about energy for the long haul, predicting powerful growth rates throughout the coming decade.

"You really have to think long term with energy and can't be a short-term trader," said Dan Hassey, senior research analyst with the Gold & Energy Advisor newsletter in Boca Raton, Fla. "The one thing that could make oil prices lower in the short run is a global recession, because lower demand would drive down prices, but they will still only go down just so much because OPEC will cut the supply."

Not everyone has the temperament to look patiently toward the future without suffering a few nervous twitches over the present. Some experts voice reservation about these stocks because they question the more optimistic estimates of world demand.

"Volatility in oil prices will continue because I don't think oil prices at $70 a barrel are justified by the current supply and demand," said Fadel Gheit, energy analyst with Oppenheimer & Co. in New York. "Demand is lower than many people think, and, despite OPEC cuts, inventory is still high."

Gheit is not investing in any energy stocks now because the near term remains uncertain.

"It's like trying to catch a falling knife, so you should wait until it hits the ground to pick it up," he said.

Shares of Diamond Offshore Drilling are recommended by Glickman and Hassey, while Transocean and GlobalSantaFe are recommended by Gerry and Glickman.

Among the bigger diversified oil services companies, Glickman likes Schlumberger Ltd. and Baker Hughes Inc. because they have huge international exposure and leading technology.

FMC Technologies Inc., which makes equipment used in deep-water drilling, is another Glickman pick. His other favorites are the drillers Ensco International Inc. and Pride International Inc.

In exploration and production, Hassey said there are several reasonably priced opportunities, such as Devon Energy Corp., Apache Corp., Anadarko Petroleum Corp. and Occidental Petroleum Corp. In services, he likes Noble Corp. and Atwood Oceanics Inc.

Never forget the typical volatility in the prices of energy stocks because that will dictate the most opportune times to buy the shares, Hassey said. For those who aren't bold enough to make individual stock picks, there are plenty of mutual funds with significant energy holdings.

The top-performing natural resources funds, which include energy, over the past 12 months, according to Morningstar Inc., have been:

Fidelity Select Energy Service, $2 billion in assets; up 47 percent.

Rydex Basic Materials, $123 million; up 38 percent.

Rydex Energy Services, $191 million; up 35 percent.

Fidelity Select Materials, $380 million; up 31 percent.

Franklin Natural Resources, $583 million; up 31 percent.

All are "no-load" (no sales charge) funds requiring a $2,500 minimum initial investment, except for Franklin Natural Resources, which requires a 5.75 percent load and has a $1,000 minimum.

"Even though investors have to be prepared for inherent volatility in the energy markets whenever crude oil prices drop a bit, the longer-term trend is still bullish," Glickman said. "The bullish outlook for all of energy's subindustries is still going to be there as well."

Andrew Leckey is a Tribune Media Services columnist.

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