Oil investing: 2007 a tough act to follow

It was a banner year for energy - the sector was up 30% and crude jumped 60%. But don't count on a repeat performance in '08.

NEW YORK (CNNMoney.com) -- It's been a phenomenal time to invest in oil, but analysts say the huge gains of the last year are most likely a thing of the past.
2007 was truly a banner year for the industry. The big integrated oil companies - ones that produce and refine crude - saw stock gains in the 30 percent range. Crude itself rose nearly 60 percent. The biggest winners were the oil production companies, some of which saw their stock prices double. Overall, the AMEX oil and gas index rose about 30 percent in '07, trouncing the near-stagnant S&P 500.
But most analysts say 2008 is unlikely to mimic the staggering returns of the last year. And on the heels of such a runup, some say the sector is simply overvalued.
Oil company stocks tend to rise and fall with the price of crude, so any prediction on stock prices needs to start with a look at the underlying commodity.
Although U.S. crude is trading near $100 a barrel, 2007 was a very volatile year. Prices began the year by dipping below $50 in January, spiking above $75 in July, then pulling back to the high $60s by the end of August before embarking on its recent record run. For the year, the average price for crude was around $72.
Most analysts have bumped up their estimate for 2008 to around $80 to $85 a barrel from the low $70s, reflecting a view that oil prices will rise but not by another 60 percent, like they did in 2007.
"I don't think too many people are talking about $150 oil, unless they're also stocking up on canned goods and ammunition," said Jeff Tjornehoj, a research analyst at the data and research firm Lipper.
John Kilduff, an energy analyst at MF Global in New York, said he expects crude prices to top $100 a barrel in the first quarter - perhaps peaking around $110 - then pull back to maybe $70 as the economy slows and speculative money retreats.
Still, he says investors are still pricing oil company stock as if oil costs $50 a barrel and sees room for those stocks to go up.
Energy and the presidential race
Companies that produce oil - as opposed to refining it - have been the stars of the sector in 2007. Frontier (FTO, Fortune 500) stock is up 45 percent, Occidental (OXY, Fortune 500) is up 60 percent, and Hess (HES, Fortune 500) has surged a staggering 105 percent.
But the stock of those companies is most directly tied to the price of crude, and with crude unlikely to post another 60 percent runup, its doubtful those stocks will see similar gains.
For the integrated companies - those that produce and refine oil - earnings growth for 2008 may be stronger than in 2007.
In the third quarter companies like Exxon Mobil (XOM, Fortune 500), BP (BP) and Chevron (CVX, Fortune 500) saw profits slip as oil prices rose much faster than gasoline prices and eroded the profit margin for refining.
When these companies report their 2007 earnings in January they will struggle to beat their 2006 results. As a result, stocks for the integrated companies lagged the producers, although they still posted healthy - 30 percent - growth for the year.
But gasoline prices have rebounded, and Reuters estimates predict a 9 percent growth in energy company earnings in 2008. That's lower than the 15.7 percent growth that it predicts for the S&P 500, but still a solid performance.
"It's still a good place for investors to hide out an make money in 2008," said Kilduff.
But others think the sector is played out.
"Fundamentally, it's expensive," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "A lot of investors are eager to get into energy, and it's pushed the values to unattractive levels."
Ablin said stocks of energy companies are expensive by a number of metrics. Their price-to-book value - the value of all their outstanding stock compared to book value of their underlying assets - is about 5 percent higher than the S&P average. Normally, energy companies have a price-to-book value about 15 percent lower, said Ablin.
He said he sees a similar pattern with other measures like price to cash flow and price to sales.
"For people holding [energy stocks], we recommend they continue holding them," said Ablin. "But we'd encourage buyers to wait on the sidelines until the values come back down to earth."
Other analysts don't see the sector as expensive, and point to the long-term trend in crude prices - strong demand and limited supply - that pushes prices higher and higher.
"It's high, but it's high in anticipation of higher prices," said Hugh Johnson, chairman of asset management company Johnson Illington Advisors. "Earnings prospects in 2008 are much brighter than they are for many other sectors."
For those looking for a deal in energy, one analyst suggested natural gas.
While companies like Chesapeake (CHK, Fortune 500), EOG Resources (EOG) and XTO Energy (XTO, Fortune 500) have had an impressive year - their stocks are up between 30 percent and 40 percent for the year - natural gas prices are likely to rise faster than oil prices in 2008, said Neal Dingmann, an energy analyst with the New York-based energy investment boutique Dahlman Rose & Co.
Dingmann said oil prices are more than 13 times higher than natural gas prices. The usual ratio is about 6 times higher, he said.
"Either oil is too high or natural gas is too low, but they won't continue at that level for very long," he said.
The spread will encourage more use of natural gas, which should drive up prices and stock values.
"I don't see any way oil can go up another 60 percent," said Dingmann. "But could natural gas go up [from about $7 per 1,000 cubic feet] to $9 or $10, absolutely. That's where I think the play is."

Baidu.com says CFO killed in China accident

BEIJING, Dec. 30, 2007 (Thomson Financial delivered by Newstex) -- China's main internet search engine Baidu.com (NASDAQ:BIDU) said its chief financial officer Shawn Wang, who helped it list on the Nasdaq stock market, has died while on holiday in China.Wang, a key figure in Baidu's successful 2005 listing on the Nasdaq, died on Dec 27, the company said in an announcement seen on its website Sunday.No other details of his death were given, and calls to the company Sunday went unanswered.'Shawn's leadership and vision helped transform Baidu into a leading US public company, and his presence will be greatly missed,' Baidu chairman and chief executive officer Robin Li said in the company statement.Baidu is often referred to as China's version of Google because of the Chinese-language search engine's soaring popularity and profits. It made a net profit of 24.2 mln usd in the third quarter of 2007.tf.TFN-Europe_newsdesk@thomson.comCopyright Thomson Financial News Limited 2007. All rights reserved.The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

Crude edges above $96

Oil gains on concerns about Middle East supply disruptions; gas futures at record high.

SINGAPORE (AP) -- Oil prices edged up Monday in Asia after declining in the previous session on a housing report that ignited fresh concerns about the U.S. economy.
Light, sweet crude for February delivery added 16 cents to $96.16 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore.
The contract fell 62 cents to settle at $96 a barrel Friday after a report showed weak figures on new home sales in the United States. The data again raised fears about a possible economic slowdown in the world's largest consumer of oil products.
Oil prices remain supported, though, by concerns about supply disruptions from the oil-rich Middle East.
Turkish jets hit suspected Kurdish rebel shelters in northern Iraq for a third time on Dec. 26. Turkey has also launched a cross border raid and fired artillery at Kurdish rebel positions since the first airstrike on Dec. 16. The rebels have vowed to take the group's battle for autonomy deep inside Turkey if the cross-border airstrikes do not stop.
The heightening of tensions in the Middle East usually brings worries that oil shipments from the region will be reduced or halted.
In late November, oil threatened to rise to $100 a barrel. It has since retreated as supplies appeared to be growing and demand seemed to be falling. But over the past several weeks, inventories have fallen in the U.S. while demand has remained strong.
Gasoline futures have been pushed to new records in recent days, in part by the Goldman Sachs Commodity Index's plan to boost its gasoline futures holdings next month. Nymex gasoline futures were untraded Monday, after closing at $2.4597 a gallon Friday.
The $90 billion fund, administered by Standard & Poor's, will boost its gasoline futures holdings by about $3 billion, according to Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service. That would raise its percentage holding in gasoline futures to 4.55 percent of the fund from 1.37 percent.
In other Nymex trading Monday, heating oil futures rose 1.31 cent to $2.6501 a gallon while natural gas prices dropped 6.4 cents to $7.322 per 1,000 cubic feet.
In London, February Brent crude added 12 cents to $94 a barrel on the ICE Futures exchange.

Counting down on Wall Street

Futures point to modest gains on last trading day of the year; existing home sales due to be released.

NEW YORK (CNNMoney.com) -- Stocks looked poised for a slightly higher on the last trading day of the year as investors awaited the latest reading on the housing market.
At 6:44 a.m. ET, Nasdaq and S&P futures were narrowly higher, suggesting a flat to positive start for Wall Street on Monday.
Trading is expected to be thin as investors count down to the start of 2008. Bond markets will close early at 2 p.m. ET.
Investors will look to a report on November existing home sales for direction. Last month's figure - an annual rate of 4.97 million - was the lowest on record amid ongoing trouble in the mortgage sector. Economists are looking for annual growth of 5 million units this month, according to Briefing.com. The report from the National Association of Realtors is due out at 10 a.m. ET.
Despite recent turbulence, U.S. stocks look set to finish the year higher. Year-to-date, the Dow is up about 7 percent, the S&P 500 is up about 4 percent, and the Nasdaq is up nearly 11 percent.
In corporate news, billionaire investor Kirk Kerkorian's Tracinda Corporation is paying $684 million for a 35 percent stake in Delta Petroleum Corporation (DPTR), an independent energy exploration company.
Among tech stocks to watch, Chinese search engine Baidu.com (BIDU) said its chief financial officer died in an accident while on holiday in China.
The Semiconductor Industry Association also said November chip sales rose 2.3 amid steep cost cutting, and annual sales may fall short of previous predictions. The news could move the stocks of semiconductor companies like Intel (INTC, Fortune 500) and Advanced Micro Devices (AMD, Fortune 500).
In global trade, most Asian markets finished the year with strong gains. Many exchanges posted gains of more than 20 percent in 2007, although Japan's Nikkei ended the year down 11.1 percent. In Pakistan, stocks tumbled 5 percent on Monday as markets reopened after the assassination of opposition leader Benazir Bhutto. European markets got off to a mixed start and will close early.
Oil rose slightly amid concerns about supply disruptions in the Middle East. U.S. light crude for February delivery rose 16 cents to $96.16 a barrel in electronic trading.
The dollar fell against the yen and was little changed against the euro.