Oil Prices and Production: Danger vs. Opportunity

The Chinese word for crisis has two characters – Danger and Opportunity. When we see the collapse of oil prices from more than $100.00 per barrel down to $45.00, clearly we have a crisis in the energy sector. The US oil industry has been hit hardest. A year ago the shale oil fracking industry was the darling of investors. Now, share prices have plummeted, companies are cutting back expenses, budgets are getting slashed, oil rigs are being taken out of service and the stage is set for some shale companies to go belly up. Shale oil is highly capital intensive and these companies are highly leveraged with huge debt.

With a an oil glut taking shape, Saudi Arabia was expected to cut production. In a bizarre twist OPEC has kept production at 30 million barrel per day. This was the trigger that set the oil plunge in motion. There are all kinds of theories floating about as to why the Saudis did this. We have to look beyond the obvious to find an answer. First off, the Saudi Royal Family owns Saudi Aramco. The Saudi Minister of Petroleum and Mineral Resources, Ali al-Naimi, has stated publicly that the Saudis have a long term energy plan and that they have been following it carefully. Saudi Aramco is spreading its tentacles into surrounding energy projects. In 2012, it purchased a sustainable petrochemical firm in Massachusetts and a start up methane conversion plant in San Francisco. In 2013 it obtained controlling interest in US Motiva Oil Refinery in Texas, the largest in the US. In 2014, it purchased a 60% stake in S-Oil, a South Korean refiner. It plans to purchase and export $1.1 billion in petroleum products. They have teamed with Exxon to explore Solar power. Their long term objective is to purchase energy assets on the cheap in this crisis atmosphere. Ali al-Naimi stated that :”Our vision is that we will be exporters of giga watts or electricity. We will be exporting both barrels of oil and giga watts of power.”

Now to Opportunity. Airlines spend 34% of their budgets on jet fuel. They stand to benefit substantially with the drop in oil prices. Here are some airline companies for investors to consider:

Copa Holdings. (CPA) This is a South American Airline Company. It has 325 flights per day to 29 different countries. In 2014 it had a 9.9% increase in passenger traffic.

Recent price $113.88 52 Week high/low is $157.98/$82.00 EPS is $11.15 PE ratio is 10.33 Dividend is $3.84 (3.33%) Market cap is $5.05 billion.

United Continental (UAL) Recent Price is $65.18 52 week high/low is $74.52/$36.65 EPS is $4.96 PE ratio is 13.32 Market cap is $24.06 billion.

Southwest Airlines (LUV) Recent price $43.24 52 week high/low is $47.17/$21.82 EPS is $2.02 PE ratio is 21.66 Dividend is $.24 (.55%) Market cap is $29.35 billion

Delta Air Lines (DAL) Recent Price $44.52 52 Week high/low is $51.06/$30.12 EPS is $3.35 PE ratio is 13.71 Dividend is $.36 (.78%) Market cap is $37.26 B

Jet Blue Airways (JBLU) Recent Price $17.19 52 week high/low is $18.20/$7.61 EPS is $.70 PE ratio is 24.31 Market cap is $5.02 billion

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