Chavez wants Venezuelan oil tankers going to places other than the USA

VHeadlines | November 21, 2005
By John Bradshaw Layfield

Politicians are demanding that the US become less dependant on foreign oil, but the
near-term options seem weak. The politics of drilling in the Alaskan
National Wildlife Reserve and the Gulf region are too hot to have
anything happen soon. Hydrogen is several years away from being an
alternative energy source.

Meanwhile, the highly fragile
political situations in the countries that are the greatest sources of
oil strongly suggest the price of oil will remain high.

Although crude hit a five-month low this past
week, it remains up 20% in the past year and will certainly spike
higher if any of the situations below turn even slightly more negative.

The President of Venezuela, Hugo Chavez, has
said he wants Venezuela oil tankers going to places other than the US.
Although the US is the No. 1 buyer of Venezuela oil, he, in sum,
prefers to earn greater political power by selling oil at a discount to
Caribbean and South American countries than at a premium to the US.

Additionally, Chavez just increased the government's take of royalties on oil profits from 1% to 30% and increased the tax rate from 34% to 50%. As a result, any non-Venezuelan company is now required to turn over more than 75% of its profits to the Venezuelan government and an increasing amount of Venezuelan oil production is government controlled.

At 9 million barrels of oil a day, Russia is a similarly important but highly volatile oil resource. Russia almost rivals Saudi Arabia as the world's No. 1 producer of oil. Russia like Saudi Arabia is considered a friend of the US, but you are dealing with two highly volatile political situations.

Iran, already subject to a US trade embargo, could face additional sanctions from the global community over its nuclear ambitions. Iran sits atop the Hormuz Strait, which 40% of world oil exports pass through every day. Meanwhile, Nigeria has had problems with civil unrest and is far from a "stable" source of oil.

I have two interesting companies that take advantage of a potential crisis in world oil exports.

Is That Corn in Your Gas Tank?

In the latest energy bill it is mandated that ethanol production increase to 7.5 billion gallons in the next 10 years, almost double current production levels.

Ford (F:NYSE) has said that it will produce 250,000 flexi fuel vehicles in 2006. Hybrid cars and ethanol 85 are some of the best, and safest politically, alternatives to foreign oil. While there are other ways to make ethanol, corn is the best; 12% of current corn production goes to ethanol.

There are already ethanol plants springing up around the country and corn prices will rise with the new demand for the crop. I believe a great way to invest in ethanol is to invest in the basics of the demand: Deere.

Some analysts are seeing the top of the market for Deere. I believe they are missing the bigger picture. Deere is trading at a forward multiple of just over 10, based on consensus fiscal 2006 earning estimates of $6.27 per share. Deere is trading 15% below its 52-week high. Wall Street has written off a great company.

With demand for alternative energy and rising corn prices, Deere is a natural beneficiary of the times.

Deere is schedule to report fourth-quarter earning Tuesday. While it's always dicey to buy stocks ahead of earnings, I believe Wall Street will be pleasantly (and positively) surprised at what it has to report.

Oil Sands

China is rapidly trying to buy up oil reserves; the Chinese learned from the Japanese that investing in exploration is not a better alternative to just buying the reserves. China has shown interest in the oil sands of Alberta, Canada.

I do not believe China will have any luck buying up oil reserves in the oil sands, just as it was shut out of the deal with Unocal. However, the Alberta Sands is a terrific play on oil that is far from sources that have crazy politics.

Most oil companies are having a hard time keeping production levels constant. Conversely, Suncor claims that it can double production by 2010 to 500,000 barrels a day.

Most oil companies have huge exploration costs. Not Suncor, which sits on one of the top proven oil reserves in the world. Suncor has no exploration costs. Maintenance and production costs are fixed. The knock against Suncor is the costs associated with getting oil out of the ground. But although other oil companies are facing higher exploration and drilling costs because of having to drill in deeper waters, Suncor only needs oil to remain about $20 a barrel to make extraction economical. I believe that is a safe bet.

Sucor has had negative cash flow in the past 12 months because of high capital expenditures, which will start becoming more and more fixed annual costs. Going forward, Suncor is going to create unbelievable cash flow and become the proverbial cash cow. With no exploration costs, this cash flow could come back to shareholders in dividends. Suncor is also a takeover target for one of the big oil companies that do not have an oil sands presence, such as BP.

Suncor is trading at a forward multiple of just over 12, based on consensus estimates of $4.41 a share. Given the fact Suncor has no exploration costs, can double its production in five years, and there is negative sentiment against most other oil-producing regions, this is a great-long-term buy.

I do not own share of Suncor currently but I am looking to buy some soon.

The Lumbering Giant Fell

On October 15, I recommended Vodafone . Earlier this week, Vodafone came out with lower forecasts because of problems in Japan, higher tax payments, and lower revenue per call.

The stock tumbled on the news but my interest in Vodafone has more to do with its coming 3G licenses. Vodafone will still have growth based on more revenue per customer, so don't panic. I still own Vodafone and have no plans of selling.

Remember: Being poor is bad, staying that way is stupid.