Edited by Iain Dey, Sunday Telegraph
Last Updated: 1:26am BST 15/07/2007
Warnings that the world is running out of oil are usually met with a heavy dose of scepticism but last week’s report by the International Energy Agency, predicting a supply crunch in five years, has hit home. According to the IEA, demand is expected to rise more than 2 per cent annually but supply will not keep pace.
This imbalance helps explain why the oil price keeps rising; crude prices were trading at $71 a barrel last week.
Key beneficiaries of the high oil price are, of course, the oil majors who are awash with cash. In a note published last month, Morgan Stanley said the market is mispricing them, notably Royal Dutch Shell (£21.17). The bank argues that the market is undervaluing Shell’s downstream business, which includes some of Europe’s biggest refining and marketing businesses. It calculates the company is undervalued by a staggering £60bn. Shell should be worth £190bn, about 45 per cent higher than its current £130bn market value.
Rivals at Goldman Sachs last week took the opposite stance, downgrading the stock to a sell and putting a target of £19 on the shares.
Ideally, we would have bought into the shares just after Shell’s reserves in 2004 when they traded below £14. Despite the rise, given that high oil prices look like they are here to stay, we believe there is still some upside to be had for anyone happy to hold the shares for the long-term. Most oil majors assume development and production costs for their reserves of around $25 a barrel – a far cry from the current levels of $70 a barrel. A solid buy.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/15/cxequity115.xml
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