placing bets on energy

WHEN crude oil sailed above $140 a barrel, analysts forecast even higher prices, virtually without dissent. Four months have passed, crude has fallen below $50, and now a rally generally seems to be considered almost out of the question.

Betting against the consensus by selling energy stocks would have paid off several months ago, and the opposite play, equally contrarian, might be profitable now. Shares of many suppliers of oil and natural gas have lost half their value or more in the stock market’s race to the bottom, and may be good buys.

Robb J. Parlanti, an analyst and fund manager at Turner Investment Partners, expects gas producers to be the biggest beneficiaries if energy prices recover. He emphasizes the “if,” however, and advises investors to “stick with high-quality companies that are good to own even if the market doesn’t come back.” Those he has in mind include XTO Energy, Range Resources, Southwestern Energy, Petrohawk Energy and Ultra Petroleum.

He also likes the prospects of oil-service companies, whose results tend to be highly influenced by energy markets. Their customers often make all-or-nothing decisions on new projects based on small differences in assumptions about future prices. He highlighted companies with globally diversified operations like Schlumberger and two deepwater drillers, Transocean and Diamond Offshore Drilling. One that he would avoid, he said, is Halliburton, because too much of its business is in the United States.

Mr. Parlanti’s just-in-case approach is keeping him out of some stocks that others might expect to do best in rising energy markets. Weaker businesses with high production costs and low returns on investment should experience the biggest improvement from higher prices for their products, but he is not counting on it.

Even if his doubts prove unfounded and there is an energy rally, such companies may not have access to financing to take full advantage of it, he said. It is also possible that big recoveries in oil and gas will be met with skepticism about their staying power, limiting gains in stocks.

Tim Guinness, chairman and chief investment officer of Guinness Atkinson Asset Management, is more bullish on energy prices and stocks. “We see huge value everywhere,” he said. “We think oil is going to trade in the $60 to $80 range, and our stocks are valued as if oil is going to $30.”

He is more eclectic in his approach, recommending stocks across many industry segments. Among drillers, his first choice is Halliburton. Its stock is cheaper than Schlumberger’s, he said, yet its earnings are likely to grow at a similar rate.

Mr. Guinness also likes independent exploration companies like Apache and specialists in oil sands like Suncor Energy, which he called “a pure play on the oil price that should have a good rally on any move back up from the mid-$50s to $70 a barrel.” He also pointed to Suncor’s valuation, less than seven times earnings.

Turning to the majors, valuation figures into his preference for Chevron over Exxon Mobil. In addition to being cheaper, Chevron has what he considers a stronger mix of business lines.

ANOTHER shortcoming of Exxon, one that would be especially noticeable in a recovery in energy demand, is its size, Mr. Guinness said. Exxon is so large that it can barely increase production. Petróleo Brasileiro of Brazil, by contrast, is expected to raise production by 6 percent to 8 percent a year for the next decade.

A company with such rapid growth is better situated to benefit from higher oil prices, but it underperforms when prices drop. That helps explain why Exxon’s stock is down about 19 percent in the last six months and Petrobras’s has lost about 76 percent.

Unlike the struggling businesses that Mr. Parlanti warned about, companies like Petrobras have suffered through the decline in part because they are good at what they do. If oil prices recover, their stocks could lead the way back up. Their potential to deliver growth when growth is needed “will help when this pathetic maelstrom is over,” Mr. Guinness predicted.

http://www.nytimes.com/2008/11/22/business/22values.html?ref=yourmoney