Private Investor: Seduced by the romance of black gold
Saturday 17 May 2008
Let's face it, there is something magnificently romantic about oil and the search for it. You can see that in the recent film There Will Be Blood, and you can sense it in the excitement that greets the price pushing through successive landmarks. At the beginning of the year $100 was breached – wow! But almost as soon as we had got used to that disconcerting notion, along comes the $120 and $125 barrel. The president of Opec says he sees it hitting $200 before long. Even as it stands now, oil has quadrupled in four years. It is difficult to believe that it was worth $10 a barrel only 10 years ago.
It may not be much fun for the rest of us, as we fill the car up and struggle to pay the fuel bills, but for the oil companies, and those invested in them, the soaring price of black gold is unalloyed good news. I've taken a long-term punt on Royal Dutch Shell, topping up the holding from time to time, and a couple of years back followed this up with a small speculative punt on Falklands Oil and Gas. Both shares are still in the portfolio, and have shown respectable returns.
I confess that I always doubted that there is much oil in the South Atlantic. After all they've been looking for it for 30 years, and, as far as I can see, haven't found a drop. Still, at $100 or $200 it will pay them to invest in ever more inhospitable climes, and, well, you never know.
More realistic are Tullow Oil's chances. Now there is another romantic tale – exploring for oil off the coast of Ghana. Here is the potential for a virtuous triple whammy – an oil find that can help keep the world supplied; profits for patient shareholders and riches for the Ghanaians. Now that they've found some oil there, should I buy the shares, I wonder.
The indications, and they are no more than that, are that the company has more excellent prospects, and as I say, every dollar the price of a barrel goes up makes those finds more feasible and profitable. The analysts point to a price of as much as £19 per share on the basis of "unrisked potential", against the 900p the shares trade at now. On those grounds Tullow Oil is obviously very tempting.
Mind you, the risks are pretty clear as well. China will almost certainly stumble before too long, and so will the demand for oil and the price of a barrel. It is always possible that Opec or the Russians or both will oblige the West and start pumping more oil. Maybe Iraq will quieten and return to the market. Demand and supply, in other words, could relatively quickly push oil down again. Where would that leave Tullow Oil?
Maybe not that badly placed, long term. You have to take a bit of a view on natural resources. The present commodities boom is just that – a boom, and will one day turn to bust. Beyond that, though, there seems little chance that the factors that have driven these prices higher over many decades will simply disappear.
So I have decided to let a little romance into my life and buy into Tullow. It's a part speculative buy based on the current oil rush, but also one that makes a case for itself on long-term fundamentals.
I ought to admit that my faith in Rightmove may have been shaken. The figures that have been coming out on the property market are truly appalling. Housing crashes, by nature, never announce their arrival. It is almost precisely at the moment when people really sincerely believe that house prices will never go down, only up, that the opposite state of affairs suddenly intervenes. Then, of course, we think house prices can only ever go down, not up. Fear replaces confidence. Then there's a switchback and people rush for the door.
All true, and worse for the estate agents, given that the volume of transactions has fallen by about a half. But again I think you have to try to keep an eye on the secular story as well, and online estate agency clearly works. The Rightmove site is the market leader and it is easy to use. All the estate agents have to use it, and as they become more desperate to shift homes they may even use Rightmove's facilities more intensively.
So long term that is a winner too, but we will have to get there along a very bumpy road.
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