Gasoline prices are soaring again, leading to predictions of a gallon reaching $4.25 by late April. As you ponder this while you're filling up at the pump, you might be tempted to ask: If only I'd invested in oil company stocks a few months ago.
It's natural to expect that rising oil prices would drive oil company stocks higher, giving politicians another opportunity to accuse the industry of making excessive profits and gouging consumers.
Yet the potential to score political points isn't as much as you might think. That's because there hasn't been a run-up in big oil stocks this year. Exxon Mobil and Chevron are only up around 3 percent, far behind the 9 percent gain in the Standard & Poor's 500 index of large-company stocks.
The results have been far stronger for many of the smaller players in the oil business. An index of stocks specializing in oilfield services and equipment is up about 13 percent. One of the biggest of those companies, offshore drilling contractor Noble Corp., has jumped 32 percent.
The wide difference in performance among energy stocks shows how hard it is for investors to pick stocks that will benefit from a spike in oil prices, like the 11 percent surge in crude we've had this year.
Investing in big oil on an expectation of rising prices won't necessarily translate into bigger returns, even if your prediction about crude prices pans out. Picking energy stocks has become more challenging because the sector has become more complex, mutual fund managers say.
New drilling technologies and the boom in production of oil from shale deposits have shaken things up, giving an edge to smaller players who are more nimble than Exxon and Chevron. Many larger players are struggling to tap new oil sources to offset production declines at existing fields.
"For an Exxon or Chevron, there's a law of large numbers that makes it hard to grow rapidly when new opportunities arise, like shale oil," says Tom Kolefas, manager of the TIAA-CREF Mid-Cap Value Fund (TCMVX).
For example, Exxon's oil and natural gas production fell 9 percent in the fourth quarter. That's despite the $20 billion a year the company has spent since 2007 to find new sources. At Chevron, production levels last year were the lowest since 2008.
The oil price spike was a buffer that helped the two oil giants stay comfortably profitable in the fourth quarter. Exxon earned $9.4 billion, and Chevron $5.1 billion.
They're likely to continue having a buffer. Oil and gasoline prices are expected to keep rising because global consumption continues to outstrip production. Oil prices also are higher because international tensions over Iran's nuclear program have fueled fears of an oil supply disruption.
The U.S. is in better position than many countries to endure a price shock because the shale oil boom is helping the domestic industry expand production.
It's also creating a wealth of opportunities for many modestly sized oil companies. Baker Hughes, a mid-sized oilfield services provider, has reported annual revenue growth averaging nearly 19 percent the past three years. It has been one of the key players driving projects to tap natural gas and oil from shale rock formations in places such North Dakota, Montana and Pennsylvania.
The boom, driven by new drilling technologies, has led some fund managers to increase their holdings of U.S. oil stocks while cutting back on foreign ones. John Dowd runs Fidelity Select Energy (FSENX), which has returned 12 percent this year with a portfolio that's almost entirely invested in U.S. stocks.
Dowd notes that the U.S. has become one of the lowest-cost producers of oil and natural gas among countries that aren't members of the 12-nation OPEC producer bloc. Land-based oil production is growing at about 14 percent a year in the U.S., fastest among countries that aren't in OPEC.
"I think this is a trend that will be in place for years," Dowd says. "You could make the case that the U.S. energy industry has completely changed."
One small company profiting from the shale boom is Lufkin Industries, a maker of oilfield pumping equipment whose shares are up 21 percent this year. Lufkin's products have been in high demand from oil drillers, and its fourth-quarter earnings jumped 42 percent.
Lufkin has also benefited from a trend that has hurt energy stocks that are more dependent on prices for natural gas, rather than oil. U.S. natural gas production has risen sharply in recent years, depressing prices and making some gas projects unprofitable. As a result, rigs that had drilled for gas have been converted to drill for oil. The natural gas price decline has hit Exxon Mobil particularly hard, because it invested heavily in gas, and now produces more gas than oil.
But small stocks like Lufkin are volatile. The shares have bounced between $42 and $97 over the past 12 months.
The volatility of many smaller oil company stocks is one reason why Fidelity's Dowd continues to like big oil stocks, although their gains have been unimpressive this year. Bigger dividend-paying oil stocks tend to outperform when the stock market is declining. And last year, when many investors sought safety in the biggest and most stable stocks, Chevron shares rose 20 percent while the S&P finished virtually unchanged.
Chevron is the largest holding at Dowd's fund, recently making up 15 percent of the portfolio. He says bigger oil stocks are investing heavily in large oil and gas projects that should bolster production for the long haul, although the payback may be years away.
Those strengths don't necessarily lift big oil stocks every time oil prices jump, as they're doing now. But long-term, Dowd says, those companies are likely to smooth out an investor's returns during the market's rough patches.
So consider that, the next time you're at the gas pump watching your money tick away as the tank fills.
Questions? E-mail the AP at investorinsight(at)ap.org
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