Dear Fellow Market Investor,
We don’t know about you, but we are sick to death of the daily news bulletins leading with stories about high petrol prices.
We are even more sick to death of hearing about the FuelWatch scheme.
Enough.
Please.
Much of it comes down to politics and votes. We are politically agnostic and couldn’t care less whether our views on petrol prices gain or lose us votes. What we passionately do care about is fattening the purses and wallets of our thousands of Members.
In fact, contrary to popular politics, we could easily sit here and cheer for even higher petrol prices, because we are confident our Members will benefit.
That’s because we have long been telling our Members and readers of this email to buy oil companies, because we were (and still are) very confident the long-term price of oil will remain above US$100 a barrel.
We’ve been busy recommending small, medium and large oil companies as BUYS to our thousands of Members. If they’ve followed our advice, by now they could be sitting on some big profits, some possibly made in a very short space of time.
We’ll have more on that a little further down, including one small oil and gas company we think still has been overlooked by the market, despite its share price already having jumped 15% in the last month.
We also name the company whose share price soared an amazing 14% on Monday alone this week after announcing a $776 million deal with global oil and gas giant Shell. It’s a great case study in how our conviction about this company’s future prospects has seen our Members suitably rewarded.
The Scary Truth About Petrol Prices
Here are the real facts and some distinctly non-political home truths about oil and petrol prices.
· Despite what any politician from any party says, FuelWatch will not make petrol cheaper. Lower oil prices will make petrol cheaper. End of debate.
· Most of the world’s cheap oil has already been discovered.
· World demand for oil is high and only going to get higher still in the years and decades ahead. For example, the IEA (International Energy Agency) forecast that
· The days of cheap air travel are rapidly coming to an end. Higher oil prices means higher airfares. They also mean less competition. Who in their right mind would launch new a new airline in today’s environment? We predict a very tough time for recent domestic entrant Tiger Airways.
· Many working families are already struggling to cope with higher mortgage payments or higher rent costs. For a nation obsessed with petrol prices, paying $1.65 a litre is a killer blow. But they haven’t seen anything yet. Higher fuel prices are cascading down the food chain – literally. Expect to see the prices of groceries continue to rise, putting yet more pressure on family budgets.
· That in turn will continue to put pressure on domestic inflation. The Reserve Bank of Australia (RBA) kept interest rates on hold this week at 7.25%, but it is getting very worried about rising inflation. We do not envy the RBA Governor Glenn Stevens. If he raises interest rates, he could put large parts of the country’s population effectively in recession. If he doesn’t raise interest rates, he risks seeing higher inflation eat away the country’s prosperity. What’s a Governor to do? Sit on the fence, of course. But as we all know, sitting on a fence for long periods of time ultimately becomes very painful.
· We were talking to a real estate friend of ours on the weekend. He seemed to be spending more time at home recently. He said it was like someone had turned off the tap about 6-8 weeks ago. Sales have completely dried up. It’s no coincidence that the tap was turned off around the same time as interest rate rises and higher petrol prices started to really bite. Expect falling house prices soon – if people really want to sell their houses, the only thing they can do is reduce the price.
Yet whilst all this is going on regarding petrol prices, house prices, inflation and whether Shane Warne will make a comeback to take on the Poms next year, there is a huge part of the Australian economy that continues on its own merry prosperous way.
The Mining Boom Continues Unabated
For anyone connected with it, whether they work directly in it or like us, are investors in it, whichever way you look at it, the mining and resources boom is continuing unabated.
· As we said above, world demand for oil is only going to rise. Global oil consumption currently runs at around 88 million barrels per day. Higher oil prices has crimped some demand, but we’re only talking around the edges.
· Oil exploration companies increasingly have to drill for oil in more and more difficult places. This adds to the cost of exploration and in the event of a discovery, the cost of extraction. Either the price of oil stays high and goes even higher, so that it makes these new discoveries economical for the oil companies, or the oil stays in the ground. Given the increasing demand and the world’s complete reliance on the naturally depleting natural resource called oil, it has to come out of the ground.
· Then there’s gas. The sector is quite literally on fire. Last week we had
· That in turn prompted Origin to reject BG Group’s $15.50 per share cash offer for the company. Significantly, Origin’s shares actually rose after the BG deal was rejected – normally shares in the target company fall when they reject a takeover. Maybe Origin has something (gas) that the rest of the world increasingly wants, and is increasingly willing to pay a hefty price to secure? Maybe indeed.
· Then we have this week news of Aussie junior gas player Arrow Energy’s $776 million deal with global oil and gas giant Shell. In a media release announcing the deal, Arrow said it “…has the largest coal seam gas (CSG) acreage position in eastern
500 Million More People Are Coming To
A couple of week’s ago we printed a table of the population of the world’s three most populous countries. Repetition is the best form of learning, so we make no apologies for re-printing it this week.
1. People's Republic of
2.
3.
They are not the only ones saying that. In a presentation last week, Rio Tinto’s Chief Executive Tom Albanese said…
“The unprecedented increase in global urbanised population will be driven by emerging markets.”
“China and India, the largest single contributors, will experience a combined increase of over half a billion people…but growth is global, with a total increase in urbanised population from 2005–25 of 1.4 billion people.”
“Demand growth remains strong and, combined with supply side constraints, this means there has never been a time at which our options for expansion have been so valuable. With world demand for our products set to double by 2022, we have the reserves and resources in place to keep pace with the market.”
The Resources Megatrend Set To Last For Decades Ahead
Regular readers will know we’ve also been saying it too, probably for longer than most. For anyone who’s been listening, we’ve been saying the resources boom is likely to last for years and even decades ahead. We were saying it when few others were saying it. We were saying it when a few more ‘experts’ started catching on.
We’re still saying it now, at a time when the mainstream media have finally cottoned on that this is a resources megatrend, not a resources bubble.
Bubbles go pop.
Megatrends go on for years and decades ahead.
Sure we’ve just had prices of commodities like copper, oil, iron ore, platinum and coal – to name just a few – rising three and fourfold in just the last few years, but we believe that just gets them to roughly the levels simple supply versus demand economics dictate they should be trading at.
That’s now. Looking further ahead, the key drivers of future growth are…
· Increasing demand, as mentioned above.
· The increasing costs of mining and resources companies…
o Higher energy costs
o Higher exploration costs
o Higher extraction costs
o The continued weakening of the US dollar
o The cost of financing
To us, it all adds up to a continuation long into the future of the resources megatrend.
On Fire: The Small
Arrow Energy is the name of the company we mentioned near the start of this email. As we said above, on Monday this week their shares soared 14% after the announcement of Shell’s huge $776 million investment.
Arrow’s share closed the day on Monday at $3.79. When we first recommended Arrow Energy as a BUY way back in November 2005, the share price was 75 cents and the whole company was worth around $500 million.
Fast forward to today and Arrow Energy is worth over $4 billion.
A $10,000 investment in Arrow at 75 cents would now be worth over $50,000.
Even Members who followed our BUY advice of just 3 weeks ago, when the shares were trading at $3.22, would already be sitting on a very handy gain of 18%.
But that may only be the start. In our BUY report of just 3 weeks ago, we said…
“
Arrow Energy has been at the forefront of corporate and development activity in the
With Arrow Energy at the forefront of a growing LNG industry in
Shock: World’s Oil & Gas Supplies Are Running Out
Obviously we’re pleased that some of our existing Members will have already benefited from the 18% jump in the share price since we published that report.
But in terms of the long-term picture for Arrow Energy and many other of our preferred mining and resources recommendations, an 18% gain could be just the beginning.
Like Rio Tinto and other major resources companies, Arrow Energy are planning way out into the future. They are looking past 2013, past 2015, and all the way out to 2020 and beyond.
Like us, Arrow Energy are planning on this resources megatrend running for decades ahead.
Remember – resources like oil and gas are naturally depleting. The world is absolutely reliant on them. Can you imagine a world without oil and gas? Maybe it could happen in 150 – 250 years time, after decades of mind boggling sums of investment, but what with the massive challenge of dealing with climate change at the same time, we’re struggling to imagine how the world might adapt and look.
Some BIG Winners
Naturally, we’ll continue tracking the performance of Arrow Energy in the months, years and decades ahead.
That’s one of the many nice things about being a Member. Once we recommend a stock as a buy, we keep following it and keep updating our Members on the latest news.
Like Warren Buffett, we are long-term investors. We like nothing more than to watch the share price of a company we first recommended as a buy a few years ago continue to rise as it increases its profits and/or makes a significant new discovery and/or launches a successful new product.
Arrow Energy is not the only long-term winner (so far) for Members. Just take a look at the performance of these specially selected companies …
Macarthur Coal – UP 1488% since September 2002.
Terramin
QBE Insurance – UP 683% since September 2001.
(All prices taken from Yahoo Finance as at Monday 19th May 2008 close)
We closely follow the progress of all the companies we recommend as a BUY right up until the day we recommend our Members sell them. Even then we will continue to monitor the performance of the company, always looking for fresh buying opportunities should they arise.
Another of the really nice things about being a Member is that because we follow our BUY recommendations so closely, we often find ourselves re-recommending them as BUYS months or years in the future. That’s exactly what we’ve done with Arrow Energy.
In fact, since that initial BUY recommendation in November 2005, we’ve made the following BUY re-recommendations about Arrow Energy…
Report Date BUY Recommendation Price
December 2005 67 cents
September 2006 65 cents
February 2007 $1.30
May 2008 $3.22
When Next? What Price?
As a reminder, on Monday this week, Arrow Energy shares closed at $3.79.
You could have done even better if you’d first bought Arrow Energy when we re-recommended them as a BUY a full 10 months after our initial BUY recommendation, in September 2006.
The shares traded even lower than 65 cents, their lowest point since our initial recommendation being 52 cents in June 2006.
As recently as January this year, Arrow Energy shares were a paltry $1.49.
The point is that for highly promising companies like Arrow Energy, with what we think are excellent long-term prospects, there are often numerous buying opportunities. And you don’t have to buy the shares just once – as you can see from the above, buying more shares at opportune moments can be an even more profitable investment strategy.
Run Your Profits For Maximum Gains
There is an old stock market saying…
“Run your profits and cut your losses”.
Unfortunately, many investors do the exact opposite.
People hate losing money. We’re no different. But people are often very reluctant to sell their losers because they can’t bear to actually book a loss. They say to themselves “I’ll sell the shares when they get back to the price I paid for them.”
Often that never happens. Shares that have already fallen say 30% can easily fall another 30% or more. In fact, most people conveniently forget shares that have fallen by say 80% or 90% can still fall another 90% from their current price.
For example, you could have bought Allco Finance Group at around $2.20 in January this year, which was 83% below their February 2007 peak of $13.24. Then, just 2 months later, the share price had slumped another 91% to trade at just 20 cents.
We’re pleased to say we never recommended Allco Finance as a BUY.
We like to run our profits. We think Arrow Energy is an excellent example of running your profits. Not only do we not sell out just because the share price has risen, we often re-recommend some of our favourite companies at higher prices, if and when the rewards outweigh the risks.
The Small Oil Company Overlooked By The Market…So Far
Which brings us nicely back to the oil price, and the small oil and gas company we think is still being overlooked by the market, despite its shares already jumping 15% in the last month.
As witnessed by our looooooooooong list of BUY recommendations, this is clearly one of our very favourite small oil companies…
Report Date BUY Recommendation Price
December 2005 98 cents
January 2006 $1.20
October 2006 $1.55
January 2007 $1.22
March 2007 $1.40
July 2007 $1.52
September 2007 $1.40
May 2008 $1.00
Here are some of the things we like about this oil company…
· Their strategy – enhancing production from aging oilfields – lowers the risk profile of the company.
· They have 100% ownership of the second-largest oilfield in
· The company recently began its first drilling programme on its second major asset, a
· To date, seven gas discoveries have been made out of seven wells drilled in 2007 and 2008. You can’t get a better strike record than that.
· Then, just last month, the company trebled its project portfolio by acquiring five projects totalling more than 19,000 acres in a prolific hydrocarbon region of central
· Unusually for a junior oil company, the company is profitable, has little or no debt, AND is dividend paying, trading on a trailing dividend yield of around 5%.
· Add all this together and it’s not surprising we’ve recommend the company as a BUY a full 8 times. We concluded one of our most recent reports about the company by saying it “…remains one of the most undervalued plays in the Australian oil sector.”
Today the company’s shares trade at around $1.16, meaning they trade below the price we were happy to recommend them as a BUY on 6 previous occasions. In our view, that still leaves plenty of upside for new investor’s a today’s price.
On top of that, we continue to remain very positive about the long-term oil price. It may not feel good at the petrol bowser, but we think it’s a good thing when you consider it from an investment in small, promising, undiscovered oil companies. Only the future will tell.
We wish you happy and profitable long-term investing.
P.S. More than one respected source has recently suggested the oil price might be headed towards US$200 a barrel. If that happens, the stock prices of the small company mentioned above plus all our other oil companies could potentially soon be heading into the stratosphere.
P.P.S. Remember the other small Thai oil company we highlighted just a few weeks ago, the company that is our best ever recommendation? We recently said we think the best days for this company could still be ahead of it. The share price has dropped back from a recent peak of 80 cents to around 69 cents, a fall of 14%. In our most recent report on the company, we recommended it as a BUY at 76 cents. Nothing has changed since then, except the share price!
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