No new good news
Stocks continue to rise and fall like boats moored to a buoy, bobbing up and down with the tides. There are no shortages of discouraging news events, most recently with a currency crisis in Europe, a naval conflict between the Koreas, the terrible oil spill in the Gulf of Mexico and a naval confrontation near the perennially inflammable area of Gaza. Such events keep slapping stocks back despite persisting low interest rates, rising corporate earnings and moderate stock valuations.
These favorable factors have been in place for months and investors seem to be waiting for some new good news. They may have to wait until late summer when we get the next round of quarterly earnings reports or even the fall when we are being told we can expect the oil spill to be capped. Global economic recovery continues but its pace remains agonizingly slow.
The oil spill may have further disruptive effects. Hurricane season is already here and any storm would set back the corrective efforts. The loss of life, of livelihoods and the damage to innocent wild life already far exceeds that of the Three Mile Island partial meltdown in 1979 that took no lives but crippled the growth of nuclear power in this country.
Use of nuclear power continued to grow in Europe and Asia and one could speculate that there might not have been overly aggressive deep water drilling off our shores if the U.S. had kept pace. In increasingly complex societies, actions often lead to major unintended consequences.
The Exxon Valdez environmental disaster of 1989 led to an oil spill liability law with a cap of $75 million, that is now at issue in the current BP debacle. Early in the Valdez litigation, a jury assessed a $5 billion punitive damages award against Exxon. Pending appeals, Exxon obtained a $4.8 billion credit line from J.P. Morgan & Co. That was big money in those days and Morgan reduced the amount of capital it would have to set aside by creating the first modern credit default swap transaction. Similar swaps later became instrumental in the failures of Bear Stearns, Lehman Brothers and AIG.
The consequences of the current environmental disaster are unknown but overdue restrictions on offshore drilling and requirements for greater disaster prevention equipment and procedures seem sure to come. The U.S. gets 25% of its oil and gas production from the Gulf and another substantial portion is exported. New production rules will add costs, inevitably resulting in higher oil prices. I expect we will again see $100 oil prices, probably by next summer.
This country consumes more gasoline than Europe, Asia, Africa and South America combined. It’s a big country and we love to drive in it. I think our gas usage is not an addiction but a bad habit that we can modify, spurred on by higher gas prices and higher fuel taxes. One consequence of this latest disaster might even be creation of a national energy policy that would provide realistic support for nuclear, solar, wind and other alternative energy sources.
Let us hope. In the meantime, I suggest looking for energy companies with less reliance on offshore drilling, particularly in U.S. waters. Occidental Petroleum (OXY-$80) qualifies nicely. Established land operations in the U.S. account for 58% of its assets, the Middle East and Latin America for the remainder. It yields 1.9% and has increased its dividend for the past seven years.
Permian Basin Royalty Trust (PBT-$18) pays over 9% in monthly distributions from its interests in royalty rates in older Texas fields. In the same West Texas basin, I also recommend Concho Resources (CXO-$55), an independent oil and gas producer that is aggressively exploring the Permian Basin as well as emerging oil and gas shale fields.
New earnings reports seem likely to be quite strong. Such new good news would probably be welcomed with an overall stock market surge.