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Cashing in on the Oil Boom

The Wall Street Journal Home Page

R.O.I.

By BRETT ARENDS

Cashing in on the Oil Boom

June 18, 2008 10:38 a.m.

Keep socking money in that energy fund. And if you haven’t been doing THAT so far – start.

No, it’s not too late. Just add money slowly, in stages.

Obviously, oil is in a raging bull market. That has taken it to just shy of $140 a barrel. The Saudi oil minister has basically admitted his country has little extra output to add. Bulls are pushing at an open door.

So if you’re sitting on the sidelines, you are missing out on profits.

But there’s another reason you should be investing.

Whether you like it or not, you are already on the other side of this market. It’s costing you a fortune now to fill up your car, air condition your home, and take the family on vacation.

(By contrast, ask yourself what extra costs you would face if you ignored a bull market in, say, platinum or in Chinese equities).

The simplest, lowest risk way for ordinary people to invest in oil is through an exchange-traded fund that invests in big oil companies. My favorite is the iShares S&P Global Energy fund, which holds leading U.S. and international oil giants, from ExxonMobil to Royal Dutch Shell to France’s TotalFina Elf.

This is a straightforward retail fund currently selling for about $152 a share. It has a dividend yield of nearly 2%.

It’s not often I recommend investing in something, like oil, that has already risen a long way. I am usually to be seen rummaging through the stock market’s bargain bin.

But in this case, as I have written before, there are reasons to make an exception.

First: So far, the boom has left big oil stocks trailing. They are actually remarkably cheap compared to oil itself. Take a look at the attached chart. I have tracked IXC, which represents the broadest basket of big oil stocks, against a three-month average of the oil price.

[Oil fund prices]

Exxon and Chevron shares are a modest 13 times their companies’ 2006 earnings. Yes: 2006, when oil averaged less than $70 a barrel.

Second: You usually know you are near the end of a huge bull run when the bears give up the fight. In the case of the oil stocks, this day is a long way away.

Out of 15 stock market analysts who follow ExxonMobil, according to Reuters, only three are strong buyers of the stock and nine are neutral.

In the case of published recommendations about ChevronTexaco andConocoPhillips, just half the analysts are bullish. Several have sell notes outstanding.

By Wall Street standards, this is a lot of skepticism. Analysts usually have a bullish bias, and are generally more bullish in public than in private as well.

The third reason for investing in oil now? Trying to “time” a bull market like this one is almost certainly a waste of time. You’ll end up waiting for a “pullback” that doesn’t come. Or you’ll miss it. Or you’ll give up waiting and plunge in at higher levels – and then we’ll see the pullback.

The smarter plan is to invest in stages.

No investments are perfectly safe. Big oil stocks have their risks too. Certainly if the oil boom miraculously bursts soon, and oil prices crash down to, say, $50 a barrel, you would expect these stocks to fall too.

The question is how far. Their share prices have already anticipate a pretty sharp fall in the oil price.

The last time IXC was this cheap compared to the oil price was in March 2003. Two things then happened. Oil fell by about a third. And the fund actually… rose 6%.

There are lots of speculative and risky ways to try to play the oil boom, from wildcat stocks to Canadian royalty trusts to consumer stocks in energy-rich countries like Russia. They aren’t for most people.

Slowly building a stake in big oil, though a sector fund, is the easier way. Maybe you won’t make the biggest profits, but you are taking a much smaller risk.

Write to Brett Arends at [email protected]

http://online.wsj.com/article/SB121371085068880879.html

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