Wednesday, September 15, 2010

4 Reasons to Be Long Oil - And Nothing Else

Oil recently dipped to 3 month lows on fears about global demand and currently hovers around $72 dollars a barrel (as of August 31st). Meanwhile, global economic and geopolitical concerns continue to lend themselves to a higher price per barrel in the coming year. The recent decline in the price of oil presents the investor an opportune speculative and defensive window, especially if oil continue to tracks demand destruction rather than inflationary pressures.

1. Big Oil provides high yields in a low yield deflationary environment.

The 1-yr UST pays .27% interest while the benchmark 10-yr UST recently dipped to an absurdly low 2.5% annual rate. Oil companies’ dividends far surpass these returns:

  • ExxonMobil (XOM)- 3.0%
  • ConocoPhillips (COP): 4.10%
  • Chevron (CVX): 3.90%
  • Total S.A. (TOT) 5.0%*
  • Statoil ASA (STO): 4.10%*
  • Royal Dutch Shell (RDS-B): 6.50%*
  • CNOOC (CEO): 2.90%*

*subject to foreign taxes

A $1,000 investment today in US Treasuries will profit $288 by 2020 while a similar investment in ConocoPhillips (assuming dividend is not reinvested) will guarantee at least yield a profit of $400. Although this ignores the security of the original capital investment, oil companies are currently “cheap”. (more)

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