Warren Buffett's 1Q09 Portfolio Shake 'N Bake

During the first quarter of 2009, Warren Buffett's insurance holding company, Berkshire Hathaway (BRKA or BRKB), made the below-listed investment CHANGES to its massive $38 Billion stock portfolio. Per financial statements published by the company along with its 1Q09 earnings report, BRKA continues to hold about $26 Billion in CASH on its balance sheet. Since Berkshire owns roughly $96 Billion in total investment assets, Mr. Buffett is sporting a cash position of 27% relative to his total investments portfolio. Lastly, with specific regard to his 1Q09 portfolio activity, it's interesting to note that Mr. Buffett did not feel the need to add any NEW names (new positions) to his equity portfolio during the three month period in which the S+P 500 index declined by 12%.

INCREASED Stakes:

* Burlington Northern (BNI) stake increased 9.5% to 76,777,029 shares from 70,089,829 shares.

* Johnson & Johnson (JNJ) stake increased 13.6% to 32,508,891 shares from 28,611,591 shares.

* Nalco Holding (NLC) stake increased 3.0% to 9,000,000 shares from 8,739,100 shares.

* US Bancorp (USB) stake increased 2.2% to 69,039,426 shares from 67,551,426 shares.

* Union Pacific (UNP) stake increased 7.3% to 9,558,000 shares from 8,906,000 shares.

* Wells Fargo (WFC) stake increased 4.3% to 302,609,212 shares from 290,244,868 shares.

DECREASED Stakes:

* Carmax (KMX) stake decreased 32.0% to 12,000,000 shares from 17,636,500 shares.

* ConocoPhillips (COP) stake decreased 10.8% to 71,228,096 shares from 79,896,273 shares.

* Constellation Energy (CEG) stake decreased 25.5% to 14,828,207 shares as of March 31 from 19,894,322 shares on December 31. The stake has since decreased to 12,476,154 shares as of May 12.

* UnitedHealth Group (UNH) stake decreased 28.6% to 4,500,000 shares from 6,300,000 shares.

http://www.berkshirehathaway.com/qtrly/1stqtr09.pdf

http://www.cnbc.com/id/30766396//


Data Courtesy: Berkshire Hathaway + CNBC
Full Disclosure: I own shares of COP.

Buffett's Largest ENERGY Bet - Conoco

According to Berkshire Hathaway's (BRKA) recently disclosed 3rd Quarter 2008 13F SEC Filing, Warren Buffett currently owns 84 million shares of U.S. Oil + Gas producer Conoco Phillips (COP). As a result, Conoco now represents Buffett's LARGEST Energy sector holding and his 5.6% stake makes him the $70 Billion oil company's LARGEST shareholder.


http://www.cnbc.com/id/27723341


Per the above link:
* Conoco Phillips is Berkshire's LARGEST energy sector holding and now accounts for about 7.3% of Berkshire's total U.S. stock portfolio

* Berkshire held 'only' 17.5 million shares of COP as recent as March 31st, 2008...meaning that Buffett's position in Conoco has increased nearly FOUR-fold in just over 6 months (!)

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Per Berkshire's 3Q08 13F SEC Filings :

* Buffett reduced stock holdings in: Bank of America (BAC), Carmax (KMX), Home Depot (HD), Lowe's (LOW), United Health Group (UNH), Wells Fargo (WFC) and Wellpoint (WLP)


* Buffett increased stock holdings in: Conoco Phillips (COP), Eaton Corporation (ETN), NRG Energy (NRG), US Bancorp (USB) and Comdisco (CDCO)


* Berkshire's CASH holdings as of 9/30/08 were $33.4 Billion (vs. $47.1 Billion a year ago)

Data Courtesy: CNBC.com
Full Disclosure: I own shares of COP and UNH.

CONOCO Goes Long L-N-G For $8 Billion

In a possible sign of things to come for the still emerging L N G energy industry, Conoco Phillips (COP), the U.S.'s 2nd largest Natural Gas producer and Crude Oil Refiner, is investing $8 Billion in a Liquefied Natural Gas joint venture with Australia's Origin Energy Ltd. The business will focus on converting Coal-seam gas into Liquefied Natural Gas for sale/export to Asia. Conoco's 50% stake in the J-V will entitle the company to a 50% ownership interest in Origin's 'Gross Resource' (think 'Reserves') of 42 Trillion cubic feet of Coal-Seam Gas.

As power producers switch to cleaner fuels, Citigroup's research arm forecasts LNG demand will increase by 10% a year through 2015...more than 5 times the projected demand growth of Crude Oil (RTOB: makes sense as Crude Oil has such a HUGE existing 'demand base' relative to LNG...given current demand levels, it would take something extraordinary for global crude oil usage to spike 10% a year...production capacity constraints would never allow supply to accommodate 10% growth anyways). FYI + According to Bloomberg, LNG is Natural Gas that has been chilled to liquid form, reducing it to 1/600th (one six-hundredth) of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit), for transportation by ship to destinations not connected by pipeline. The gas is odorless, colorless, non-toxic and non-corrosive. On arrival, it's turned back into gas for distribution to power plants, factories and households.


http://www.bloomberg.com/apps/news?pid=20601087&sid=a0aFYl4uRBO4&refer=home


Additional points per the link above:
* At a marketcap of $15 Billion, Origin Energy Ltd is Australia's Largest Producer of Gas from Coal seams...coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced (usually after water is removed)


* The companies plan initially to build 2 LNG 'Production Units' (plants), each with a capacity of 3.5 million metric tons a year, with deliveries scheduled to start by 2014


* Origin Energy will operate the coal-seam gas production part of the venture, while Conoco Phillips, which already operates an LNG plant in northern Australia, will operate the LNG output.



Data Courtesy: Bloomberg
Full Disclosure: I own shares of COP.

OPEC's Worldwide SHARE of Crude OIL

According to Bloomberg, OPEC's (The Organization of Petroleum Exporting Countries) Share of WW Crude Oil Production is about 42%.

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Somewhat Related (and also according to the below Bloomberg link) :

* The GULF of Mexico is responsible for producing about 14% of the United States' total Oil + Gas PRODUCTION

* The U.S. Gulf coast along Louisiana and Texas is home to about 42% of the U.S.'s total Crude Oil REFINING CAPACITY


bloomberg.com/apps/news?pid=20601087&sid=awi3JTmcVadg&refer=home

Data Courtesy: Bloomberg

COP 2Q08 Earnings Recap

Conoco Phillips 2Q08 Earnings Report Stats:

Beat ?: Yes (reported $3.50 cents/share vs estimates of $3.33/share...21% earnings per share growth over 2Q07's normalized $2.90 per share)

Profits --> Up 13% to $5.4 Billion (from a normalized $4.8 Billion)
Sales --> Up 51% to $71.4 Billion (from $47.4 Billion)

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COP's Earnings by Business Segment:

1.) ENERGY EXPLORATION + PRODUCTION OPS:

E+P Profits: Up 90% to $4.0 Billion (from 2Q07's $2.1 Billion)

E+P Profit Per BOE: Up 273% to $25.12 per BOE (vs. 2007's Avg of $6.73)...BOE or Barrel of Oil Equivalent: a unit of energy based on the approx amount of energy released by burning One Barrel of Crude Oil)

Avg Realized International Oil Price: Up 83% to $119 per barrel (from 2Q07's $65)
Avg Realized International Nat Gas Price: Up 45% to $10.94 per BTU (from 2Q07's $7.55)

Total Energy Production: Down 8% to 2.2 million BOE per day from 2Q07's 2.38 million BOE per day

Energy Production Ex Lukoil: 1.75 million BOE (vs. 2Q07's 1.91 million BOE...a year over year drop of 8%...decrease in yoy production mainly due to the Venezuelan government's expropriation of the company's Venezuelan oil projects - this resulted in COP taking a $4.5 Billion charge in 2Q07)

Natural Gas Sales: 4.8 Billion cubic feet per day during 2Q08 (vs. 2Q07's 5.1 Billion)

Exploration Expenses: $288 million (vs. $259 million in 2Q07)

2.) MIDSTREAM OPS:

Midstream Profits: Up 59% to $162 million (from 2Q07's $102 million)

3.) REFINING + MARKETING OPS:

R + M Profits: Down 72% to $664 million (from 2Q07's $2.4. Billion)

R+M Profits Per Barrel: Down 53% to $2.33 per BOE (from 2007's Avg of $5.00)

U.S. Refinery Margins: $10.29 per barrel

International Refinery Margins: $6.70 per barrel

WW Refinery Capacity Utilization Rate: 93% (vs. 2Q07's 93%)

U.S. Domestic Refinery Capacity U-Rate: 94%

International Refinery Capacity U-Rate: 88%

R+M Expenses: $170 million (up 193% from 2Q07's $58 million)

4.) LUKOIL OPS:

Lukoil Profits: Up 47% to $774 million (from 2Q07's $526 million)

COP's Lukoil Daily Production: 448,000 BOE per day (equivalent to 215K Barrels of Crude Oil per day)...20% of COP's 2Q08 Energy Production came from Lukoil

* COP's 2Q08 Lukoil earnings include a $120 million adjustment in costs to reflect lower than estimated Lukoil earnings during the previous quarter (1Q08)

5.) CHEMICALS OPS:

Chemicals Profits: Down 74% to $18 million (from 2Q07's $68 million)

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Other Highlights + Guidance:

* 2008 Production Guidance: Excluding Lukoil, full year 2008 Production will average about 1.8 million BOE per day...Conoco's 3Q08 E+P Expenses will be around $375 million

* Free Cash Flow: COP generated $5.4 Billion in Cash during 2Q08...With this money COP: 1.) Repurchased $2.5 Billion of Conoco Phillips company stock, 2.) Funded $3.6 Billion of its capital spending program, and 3.) Paid $0.7 Billion back to shareholders in dividends.

* Stock Buyback Program: As part of its $10 Billion authorized Stock Repurchase program for 2008, COP plans to spend about $5 Billion buying back company stock during the 2nd half of 2008 (the company has already spent $5 Billion buying back stock during the first half of 2008)

* Shares Outstanding: COP's 'Float' or Shares Outstanding decreased by 6% year over year to 1.56 Billion shares (from 2Q07's 1.66 Billion shares)...Conoco's repurchase of company stock contributed 33% or 20 cents to 2Q08's year over year EPS growth of 60 cents. Since the beginning of 2008 COP has spent $5 Billion purchasing its own stock.

* Effective Tax Rate: 44% (vs. 2Q07's 41%)

* Cash On Hand: $787 million

* Return On Capital: 20%

* Debt To Capital Ratio: COP ended 2Q08 with $21.9 Billion in Debt and a 19% Debt to Capital Ratio

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Conference Call Quotes:

* COP CEO on 2008 Capital Spending + Stock Buyback Plan: "On share repurchase...(the) market can expect we are going to do $10 Billion share repurchase in 2008 and going at a rate of $2.5 Billion a quarter. Capital spending is going to be around $15 billion, maybe a little bit more, but $15 billion, $16 billion."

* COP CEO Jim Mulva on COP's International Projects: "See now, we recently signed interim agreement with Abu Dhabi National Oil Company (ADNOC) to develop the Shah gas field in Abu Dhabi and elsewhere in the Middle East, we approved the continued funding, moving forward for the development of the Yanbu Export Refinery project with Saudi Aramco. We’re pleased to be working with both ADNOC and Saudi Aramco on these world-class projects. It helps meet the growing demand for energy not only in the old Middle East but also around the world. We recently signed a MoU ('Memorandum of Understanding') with Petrobras (PBR), as you know the largest Brazilian Energy company, and with this agreement we hope to sort through opportunities to work together in our core businesses, upstream and downstream, as well as energy opportunities such as ethanol in Brazil."

* COP CEO on COP's North American Pipeline Project (Keystone): "In North America, our joint venture with TransCanada, we plan to expand the Keystone crude oil pipeline system, providing additional capacity of 500,000 barrels per day from Western Canada to the U.S. Gulf Coast...we expect to use it by taking Canadian crude all the way down to the Gulf Coast because there's good optionality to be in our refineries in Mid-Continent and Gulf Coast, both from Canada as well as from say Venezuela and other crudes that we can get from Mexico and other places around the world.

* COP CEO on Partnership with Brazil's Petrobras: "We’re merely looking at the opportunities on how we can participate in exploration and production both in Brazil as well as outside Brazil and then we also, with our large refining segment in North America, we kind of explore and ultimately, we’re having more crude oil production when there is an opportunities for us to be working with each other in the downstream part of the company and then for both companies...We need a lot of ethanol ultimately to blend into our gasoline and so we’re looking at the opportunities of being such large ethanol producer in Brazil and how Petrobras participates in that and whether there’s opportunities for us to be working with each other. So to go any further than that, we are really in initial phases of this study work of the MoU but we‘re really pleased to be working with Petrobras.

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Additional Misc. Conoco Phillips Info:

* COP is currently the 3rd Largest U.S. Oil Producer by marketcap

* Conoco purchased Burlington Resources in 2006 for $35 Billion to become the U.S.'s Largest Natural Gas Producer

* In addition to being the U.S.'s largest natural gas producer, COP is also the 2nd Largest Oil Refiner in the country (Valero or VLO owns the largest refining capacity in the United States)

* COP owns and operates 12 Refineries in the U.S. - 2 of which are part of a joint venture with Canada's Encana (ECA)...COP also owns refineries in Europe (Germany and the United Kingdom)

* COP has previously stated it earns $130 million, or 8 cents a share, for EACH $1 increase in Oil prices, and $33 million, or 2 cents, for EACH 25 cent gain in Natural Gas prices per thousand cubic feet.

Full Disclosure: I own shares of COP.

Marcin's Interview with Barron's

One of my favorite (because he's been right more times than wrong) market commentators, Robert Marcin, was profiled by Barron's last week. Candidly, I'm not a big fan of Barron's but I did enjoy their interview with Mr. Marcin, Realmoney.com contributor + founder of the $500 million Defiance Asset Management hedge fund. The link below is worth checking out as he describes his equity management style, favorite sectors + stock recommendations in depth:

http://online.barrons.com/article/SB120916336912346003.html

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*Marcin Quotes from the interview:

"We're among the deepest-value managers out there. The average P/E of the longs in our portfolio is nine. These companies are showing average annual earnings growth of 15%. All of them have good balance sheets."

"We have coined a term called G Ice. It stands for global infrastructure, commodity and energy. It captures many different industries, including construction, machinery, energy and even technology...Many people today still don't realize that the growth companies of this decade are global infrastructure, commodity and energy companies and not necessarily firms making deodorant, soda, diapers or drugs. We're not buying yesterday's winners that are now trading for 20 times earnings. Coca-Cola (KO) is a great company but it's a 20-P/E stock that has annual earnings growth of 10%. I want to buy the reverse, a 10 P/E stock growing at 20%. For the past 20 years, people thought the only areas of secular growth were consumer products, health care and technology. They treated economically sensitive companies as deep cyclicals and didn't value them properly."

"There's concern about the U.S. economy and whether the weakness here will spread abroad. WE're BETTING IT WON'T. These companies are satisfying the explosive global demand for energy, commodities and infrastructure. Most every company that we are talking about has 15% annual growth in revenues and profits if the cycle continues, and yet they all trade for around 10 times earnings."

"For the past year, we've liked natural gas and the story is beginning to play out. Gas has rallied, but it's still very undervalued relative to oil on an energy-equivalent basis. Our favorite energy stocks are exposed to natural gas. Conoco Phillips (COP) is one of our largest holdings...(at $84/share, the stock is trading at) only about seven or eight times estimated 2008 earnings. Among the super-major energy companies, Conoco is the best U.S. natural-gas play, thanks to its acquisition of Burlington Resources. Conoco has a lot of earnings leverage to $100-plus oil and $10 per Mcf [thousand cubic feet] gas and it has the lowest valuation in the group. Conoco could deliver positive earnings surprises...If commodity prices hold these levels and Conoco continues to aggressively repurchase shares, it could make $14 next year. If the stock were to trade at nine to 10 times earnings, that could be $120 to $140 a share. If the energy complex rolls over, we have a fair margin of error given the low valuation...Nabors (NBR) is expected to earn $3.15 this year and nearly $4 next year. Those estimates could be conservative for one simple reason: Every energy exploration and production company in the U.S. has a new play, whether it be in Pennsylvania or Wyoming. The combination of drilling technology improvements and high gas prices is going to lead to a significant increase in drilling over the next two to three years. Nabors gave an interesting presentation recently in which it outlined a scenario whereby the company could potentially earn $6 a share in profits in 2010 or 11. If Nabors earns between $5 and $6 in a few years, the stock should get to $60."

"We are negative on the COAL stocks and the coal industry in general. It's a dirty fuel that has been growing less than 2% annually here in the U.S. and somewhat faster abroad. Coal has one main use on the planet now, and that's to boil water to create steam to generate electricity. There is going to be growing political pressure to reduce coal usage. We think improvements in solar technology over the next decade will dramatically reduce the growth of coal demand.
I will make a very bold statement. I've seen some work done on solar concentration, where you use sunlight with mirrors to boil water and generate electricity. If this technology is as successful as its inventors contend, in 10 or 20 years, coal will be obsolete. Coal stocks trade at very high valuations."

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*Anecdotally, I agree with Mr. Marcin's opinions on crude oil + natural gas but I'm a little bit weary about his thoughts on coal becoming an obsolete fuel in the not so distant future. In his statement above I believe Mr. Marcin is omitting a very important use of (coking) coal...COKING coal is ESSENTIAL for the manufacture of STEEL. Per my April 6th 2008 post, 'A Triple for Coking Coal Prices', BHP Billiton (BHP) recently increased the price its charging to customers for coking coal from $98/metric ton in 2007 to $300 in 2008! If that's not a sign of robust demand then I don't know what is..

Data Courtesy: Barrons.com.
Full Disclosure: I own shares of COP.

ENERGY 'Conviction Buys' - HAL + COP

For my reference, Halliburton (HAL), the American natural gas producing company, was Added to Goldman Sach's (research) Conviction Buy List today, 4/30/08.

Coincidentally, Goldman's Conviction Buy List also currently lists Conoco Phillips (COP) as its #1 Integrated Oil company (FYI, COP also has great exposure to natural gas - please refer to some previous 'Conoco Phillips' posts).

Full Disclosure: I own shares of HAL and COP.

Nat Gas, CHK + A 'Newfound Renaissance' ?

In an earlier post dated 3/11/08, I noted the HUGE amount of INSIDER BUYING at NATURAL GAS producing company, Chesapeake Energy (CHK). To recap, Chesapeake Energy CEO Aubrey McClendon purchased $23 million of company stock in March.

Guess he wasn't done.

Aubrey's back and just disclosed another purchase of CHK company stock. On Wednesday, the CEO of CHK bought 500,000 MORE shares at an average price of $45.75/share. ..an additional $22.875 million worth of shares!

Since February 26th of THIS year, Aubrey's bought over $73 MILLION worth of company stock!

Bottom line, Aubrey's buying bolsters my own bullish feelings for the near term outlook of natural gas stocks (FYI, I'm participating in the current Nat gas bull run via being long shares of natural gas driller/producers Halliburton, HAL + Conoco Phillips, COP)

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*Lastly, it should be noted that CNBC market commentator, JIM CRAMER, is currently a huge natural gas bull..but Not just for the immediate short term.

Cramer recently stated that, "Nat gas could be in the early innings of a newfound RENAISSANCE after several years in the wilderness..."

He believes that natural gas, which is -

* DOMESTIC (plenty of Nat gas reserves available in the U.S...What is this 'foreign oil' you speak of?),

* ABUNDANT (relative to the reserves of other energy commodities like crude oil + ethanol)
And one of the

* CLEANEST burning fossil fuels, may be the BIGGEST energy resource commodity beneficiary of a Democratic White House.

Full Disclosure: I own shares of HAL and COP.

REF - World's Largest Natural Gas Reserves

The World's Largest PROVEN Natural Gas Reserves (according to the 2007 CIA World Factbook):

Country: Reserves / Date of Info:

*WORLD: 165,843.265 / 2003 est.

1 Russia: 47,570 / 2003 est.
2 Iran: 26,620 / 2001 est
3 Qatar: 25,770 / 2004 est.
4 U.A.E.: 6,006 / 2003 est.
5 United States: 5,451 / 2003 est.
6 Nigeria: 4,984 / 2003 est.
7 Algeria: 4,545 / 2003 est.
8 Venezuela: 4,276 / 2003 est.
9 Iraq: 3,115 / 2003 est.
10 Indonesia: 2,760 / 2004 est
11 China: 2,350 / 2003 est.
12 Malaysia: 2,124 / 2004 est.
13 Norway: 2,085 / 2003 est.
14 Turkmenistan: 2,010 / 2004 est
15 Uzbekistan: 1,875 / 2003 est.
16 Kazakhstan: 1,841 / 2003 est.
17 Netherlands: 1,756 / 2003 est.
18 Egypt: 1,657 / 2003 est.
19 Canada: 1,603 / 2003 est.
20 Kuwait: 1,572 / 2003 est.

*Estimates are in billions of barrels per day.

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* Russia is #1 by a WIDE margin...holding approx 30% of the world's natural gas reserves (this is WHY I love COP's 20% stake in Lukoil) !

* The world's largest gas field by far is Qatar's offshore North Field, estimated to have 25 trillion cubic metres (900 trillion cubic feet) of gas in place.

* Natural gas burns CLEANER than other fossil fuels (including oil and coal) and produces less carbon dioxide per unit energy released. For an equivalent amount of heat, burning natural gas produces about 30% less carbon dioxide than burning oil and about 45% less than burning coal

* Natural gas SUPPLY is expected to peak around the year 2030, 20 years after the peak of oil. It is also projected that the world's supply of natural gas could be exhausted around the year 2085.

Data Courtesy: Wikipedia

Bullish On Energy + COP

Some interesting investing notes about one of my favorite integrated oil plays, Conoco Phillips (COP). Data courtesy of Wikipedia.com + Conoco's very own Investor Relations link below:

*MATURE, CHEAP + NOT COMPLACENT --> COP is a MATURE $120 Billion market cap company + stock ($1000 invested in COP 20 years ago would be worth around $24,000 as of year end 2007) currently trading at a P/E of roughly 10 x earnings (and 9 x forward 2008 projected earnings). While the company's been around since the late 1800's, you should not confuse them with another larger and arguably lazier peer (Exxon Mobil...XOM's marketcap is currently $460 Billion). Unlike Exxon and some of the other larger oil companies, Conoco continues to actively invest a significant portion of its free cash flow enabled capital back into oil exploration + drilling. For example, during their March 12th Analyst Day, COP announced they would increase their 'new play' budget spend (capital allocated to newer, relatively unexplored geographic areas) in 2008 by 33% to $800 million.

*NATURAL GAS EXPOSURE --> COP is the 2nd largest U.S. natural gas producer (purchased Burlington Northern Resources in 2006 for $35.6 Billion). According to the Wall Street Journal, gas produces about 20% of the nation's electricity and heats about half of the country's homes.

*OIL REFINING LEADERSHIP --> COP is the 2nd largest U.S. oil refiner with 12 U.S. refineries combining to process a crude capacity of about 2.2M barrels per day. Worldwide, the company has a combined crude processing capacity of about 2.9 million barrels per day making it the 5th largest refiner IN THE WORLD.

*LARGE CANADA TARSANDS POSITION --> They are the largest U.S. energy company stakeholder of the Canadian Athabasca oil sand reserves + is targetting a long term annual production growth rate of 30%.

*LUKOIL STAKE --> Russia holds the world's largest reserves of natural gas and Lukoil is Russia's largest oil company and producer. The Strategic 20% ownership stake in Russian Lukoil accounted for 19% of Conoco's total 4Q07 oil + natural gas production (426 million barrels per day/2,261 million barrels per day) !

*CASH FLOW, BUYBACK + YIELD --> Per its analyst day on 3/12/08, COP is expecting itself to generate approx $28 Billion in free cash flow during 2008...they plan to use $10 Billion of this cash to repurchase its own shares (including dividends, COP plans to return a total of $13 Billion directly to shareholders). Currently COP sports a pretty attractive 2.5% dividend yield.

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Breakdown of Conoco's 4Q07 profits by business unit:
1.) Exploration + Production --> $2.6 Billion (60% of earnings)
2.) Refining + Marketing --> $1.1 Billion (25% of earnings)
3.) Lukoil, etc. --> $641 million (15% of earnings)

Breakdown of Conoco's 2008 E+P total oil + nat gas production OUTLOOK by geo:
1.) US --> 46%
2.) Middle East, Russia/Caspian, Africa, etc. --> 27%
3.) North Sea --> 18%
4.) Asia Pacific --> 9%

http://www.conocophillips.com/investor/financial_reports/index.htm

Data Courtesy: Wikipedia.com and COP Investor Relations, snagged on 3/24/08.
Full Disclosure: I own shares of COP.

COMMODITIES - A Super Cycle or Just a WILD RIDE ?

Commodities can often be a WILD RIDE. So wild in fact that I wanted to opine on what I think are the current UPs, Downs and Unknowns to investing in commodity stocks...you decide if you think the risk is worth the potential reward$:


UPS - This is why you keep commodity stocks in your portfolio:
1.) GLOBAL FOOD SHORTAGE --> Food related commodity prices should continue to benefit in the long term as formerly 2nd and 3rd world nations continue to prosper and demand MORE food at a better quality.

2.) BRIC + REST OF WORLD GROWTH --> B.R.I.C. and other R.O.W countries continue to expand at an impressive yet healthy-looking, sustainable pace. According to the CIA's World Fact Book web site, China's growing its GDP at 10-11%, India and Russia are both growing around 7-8% and lastly, Brazil's bringing up the rear with ONLY 5-6% GDP growth. I will not back down from my strongly held belief that all 4 are still going through INDUSTRIAL REVOLUTIONS at the same time. For instance, Brazil is now energy independent and prospering on record high prices for commodities ranging from coffee to iron ore to orange juice to ethanol. Still, Russia is even more of an energy story, benefiting from holding the world's largest energy reserves (#1 in in natural gas reserves, #8 in crude oil reserves). The last two of the B.R.I.C. countries, India and China, both have GIGANTIC booming middle classes..arguably their greatest resources when engaging other nations in economic trade discussions.

3.) UNDENIABLE INDUSTRY CONSOLIDATION --> Probably the single-best reason to own commodity stocks today. Even if the short term's volatile, stomach the churn and I believe there's a better than not chance (if you pick your target right) that your company gets a takeover bid in the next 5-10 years. This industry is consolidating like MAD, witness some of the most recent examples:

1.) CVRD Vale (RIO) bought Inco - NICKEL
2.) Conoco Phillips (COP) bought Burlington Resources - NAT GAS
3.) Rio Tinto (RTP) bought Alcan - ALUMINUM
4.) Freeport-McMoran (FCX) bought Phelps Dodge - COPPER
5.-10.) Arcelor Mittal (MT) bought EVERYONE - STEEL

In fact, BHP Biliton recently offered to buy Rio Tinto for $147 Billion...if that deal is consumated it would be the LARGEST TAKEOVER EVER in any sector...YES, that's how much money is at stake in this sector.

Who's next to EVENTUALLY get aquired? I'd say it makes sense to bet on my favorite name, the $30 Billion Freeport-McMoran Copper + Gold (FCX). If copper's not your thing then there are other options like Alcoa (AA), Devon Energy (DVN), Cleveland-Cliffs (CLF), Reliance Steel (RS), etc.

4.) ULTRA CHEAP P/E's --> The average S+P 500 P/E multiple is 15. On a P/E basis, commodity and material stocks are one of the market's cheapest sectors. Exp's: FCX, COP and HAL all have P/E's of 10! RIO has a P/E of 12...BHP has a P/E of 14...Alcoa (AA) has a P/E of 12. Needless to say, even despite the recent bull run in commodities these stocks still appear cheap.

5.) HIGH YIELDS --> Commodity and material stocks are among the market's highest yielders. For example, BP yields a 5.5% dividend...COP yields 2.5%...PCU yields 6%...FCX yields 2%.


DOWNS - The downside of owning commodity stocks today:
1.) THE STOMACH CHURNING --> During the rough times it is important to remind yourself that by their very nature, commodities and commodity related stocks trade with much more VOLATILITY than the average stock. Violent moves up and down can take place daily because of the sheer amount of variables (and the various interpretation of how those variables impact the price) that exist and are involved in determining the commodity's value.

2.) DE-LEVERAGED TIMES --> Over the past year or two, commodity prices have been benefiting from LOTS of LEVERAGED 'speculative' INTEREST. Before getting scared realize that no one knows the ratio of buying vs. selling that these leveraged-up funds used. Maybe this speculative money's been shorting commodities? Anyways, in the wake of Bear's 30 X (L)everaged demise, expect wall street to unwind or be FORCED to unwind the LEVERAGE trade.

3.) HISTORICALLY HIGH PRICES --> Virtually all commodities are selling at historically high prices (although NOT record high prices when adjusted for inflation; i.e: gold and oil are not at record highs).


UNKNOWNS - Open questions the market is grappling with:
1.) GLOBAL RECESSION ? --> Will the U.S.'s recession spread to the rest of the world and become a global recession? Or will The Federal Reserve's recent liquidity measures prevent the U.S. from cooling down the BRIC + ROW global growth story? Expect commodity demand to drop (and prices to soften) significantly in the event of GLOBAL recession. Also, please remember that 'recession' implies a temporary or short-term decline...if your perspective is 3-5 years+ then this issue should not concern you...in the grand scheme of everything a recession will NOT mark the end of the global growth story).

2.) DIRECTION OF THE DOLLAR ? --> Commodities (including wheat, gold and oil) have been trading inverse to the dollar (while the dollar's been weakening commodities have shot through the roof)...after the Fed's latest move, is wall street now betting on a dollar reversal and therefore concluding we've seen some kind of a top in commodities? If so, a top for HOW LONG ? (1 month? 3 months? 1 year?).


Full Disclosure: I currently own shares of FCX, COP, DE and HAL.

U.S. Refiners + Leverage to Gasoline Crack

* In refining a barrel of crude oil, U.S. refiners like Valero (VLO), Tesero (TSO) or Conoco Phillips (COP) produce roughly two units of gasoline for every one unit of diesel/heating oil products...meaning that the crack margin from gasoline (vs. heating oil) is far more important to the earnings momentum of U.S. oil refiners

Data Courtesty: Daniel Dicker, Thestreet.com, snagged on 3/18/08.
Full Disclosure: I currently own shares of COP.

A Bullish Bet on NATURAL GAS?

Chesapeake Energy (CHK) CEO, Aubrey McClendon, bought 100,000 shares of CHK at an avg price of $45.70/share on 3/06/2008 ($4.5 million worth of stock).

On 3/05/2008, Aubrey bought $400,000 shares of CHK or $18.5 million worth of stock!!

Looks like NATURAL GAS will continue its somewhat stealth run (natural gas is currently trading at $10.02 per BTU). Jim Cramer recently stated he had a $16 per BTU target on natural gas.

Full disclosure: I currently own shares of HAL and COP.