Warren Buffett says: “Be fearful when others are greedy, and be greedy when others are fearful.” But sometimes it is very difficult to follow this advice, and the current situation for BP’s (BP) stock shows why.

While images of oil-covered birds and tar balls washing onto formerly pristine beaches may give some investors pause, the market, as always, is trying to focus on what the stock is worth given current information. The oil giant’s stock fell more than 50% from Apr. 20, when the massive oil spill began in the Gulf of Mexico, to June 9. Since then, some investors have been getting greedy, pushing shares up 15.8% from their low.

The decision to buy BP stock makes some sense. Even after downgrading the stock on June 10, Standard & Poor’s equity analysts peg BP’s 12-month target price at $58. On June 9, Morningstar lowered its “fair value estimate” for BP shares from $56 to $40. Both those estimates are still well above June 11′s close of $34.

But is it even possible to assign a price to BP shares at this point? I’m skeptical because all the usual ways we value stocks seem to not be working.

1. We don’t begin to understand the true impact of the current situation.

The best example is the news that scientists now estimate the oil well is spewing 20,000 to 40,000 barrels of oil per day. That’s up from a May 27 estimate of 12,000 to 19,000 per day. In other words, we really have no clue how much oil ultimately will end up in the ocean — and what the final cost of the cleanup will be.

2. We don’t know BP’s true financial strength.

The Atlantic’s Daviel Indiviglio does some of the math on the possible impact of the oil spill on BP’s finances. Even taking into account BP’s costs so far, the company still might be making a profit of $9 million per day, he calculates.

I’d add that valuing BP’s businesses based on financial metrics was already difficult before the spill. The price of oil is highly variable, which means that predicting BP’s future prospects is very difficult. According to Bloomberg, this is the quarterly free cash flow for BP over the past 7 quarters (starting from the first quarter of 2010 to the third quarter of 2008): $3.4 billion, $1.6 billion, $3.1 billion, $1.5 billion, $755 million, -$143 million (yes, that’s negative), $7.1 billion.

3. History is no guide.

Morningstar’s Jeremy Glaser points out that markets reacted very differently to the Exxon Valdez spill in 1989:

Exxon stock was trading at a little more than $11 a share before news of the Valdez crash March 24, 1989.The stock steadily fell during the coming weeks, bottoming out at $10.44 on April 11, a fall of less than 7%. Exxon’s share price was then able to quickly make up ground and keep increasing, ending 1989 7% above where the stock was before the accident.

4. This is becoming a political issue.

As British research firm McCall, Aitken, McKenzie & Co. noted June 9:

There remains a chance that the political fervor in the U.S. (and elections are happening now) will whip up to a point where BP gets red carded. [In soccer/football, getting a red card means you've been ejected from the game.] It would be foolish to dismiss that as an impossibility. The fines and penalties due are commercial financial calculations but as we have been saying for several weeks, this is beyond ‘business.’

Adding to the complicated political math, British Prime Minister David Cameron is sticking up for BP, saying it must remain “financially strong and stable.” He is due to tell President Barack Obama that on June 12.

If the BP oil spill is now “beyond business,” the spill’s long-term impact is impossible to calculate. And with the company’s prospects as clear as oil-fouled seawater, investors may not want to make any moves just yet.

Original source for this article: Business Week

Lately the IPO market has been very difficult to impress. Apparently a Nobel Prize helps do the trick.

For months, investors in the initial public offering market have complained about the quality of the new equities making their debut. Against that backdrop, today’s successful IPO for Financial Engines (FNGN) stands out.

Financial Engines was founded in 1996, by William Sharpe, a co-winner of the 1990 Nobel Prize in Economic Sciences for “pioneering work in the theory of financial economics.” (Sharpe developed the “Sharpe ratio,” a measure how much investors are compensated for taking on risk in investments.) His company provides low-cost, online financial advice and manages retirement funds in employer-sponsored plans.

On Mar. 16, Financial Engines became the first IPO of 2010 to price above its initial offering range — out of 26 U.S. IPOs since the beginning of the year. The stock was initially estimated to sell for $9 to $11 per share, but premiered at $12. Then, when it began trading, the stock climbed higher all morning, eventually closing at 17.16, a 43% one-day return.

Of course, Sharpe’s prize isn’t the only thing that caught investors’ attention. Financial Engines is profitable and growing rapidly.

For example, the company:
• Saw revenues grow 19% in 2009, to $85 million.
• Reported net income of $5.7 million in 2009, its first profitable year.
• Saw its assets under management jump from $1 billion in 2004 to $25.7 billion last year.
• Provides services or runs retirement plans at 760 plan sponsors, including 116 Fortune 500 companies, for about 7.4 million plan participants.

Executives believe much more growth is possible. Financial Engines’ prospectus reads:

As the burden of retirement investing shifts to the individual, we believe that there is an increasing need for assistance and guidance on how to maximize retirement wealth.

If Financial Engines stands out so much, it’s probably because so many other IPOs in the last four months have fallen short.

Scott Sweet, managing director of IPO Boutique, tallies up the complaints: Private equity firms going public “with enormous debt loads.” Unlike the profitable Financial Engines, companies “not making any money.” IPOs that are inferior alternatives to competitors already on the market with long track records.

Over and over again, companies have been roundly rejected by investors. To take one example, Crude Carriers (CRU) — a transporter of crude and fuel oil by ship — went public on Mar. 11 priced at $19 per share, the low end of its predicted range. It closed on Mar. 16 at 18.07, offering its initial investors a 4.9% loss in four trading days.

Maybe the brokers that bring IPOs to market have learned a lesson. Sweet notes that several promising IPOs have filed recently. He says:

Underwriters are tired of having to slash virtually every deal below the original filing range to garner any interest. [They] have retooled and said, ‘We’re going to bring better-quality companies’ [to market].

Among those promising IPOs that could be heading to market, Sweet mentions video game renter Gamefly, prepaid debit card provider Green Dot, Tesla Motors and CBOE Holdings. Financial Engines proves that investors aren’t out to reject all IPOs — just those that don’t meet their high standards.

Original source for this article: Business Week

Lee Lowell, Stock and Commodity Options Specialist with Investment U, evaluates the commodities market – specifically the demand drivers of gold and oil, and how to play them.

Lee Lowell (Investment U):

If you’re looking for some calm during the market’s ongoing storm, don’t expect to find much in the commodities sector.

Not that this is a bad thing.

If you know what you’re doing, commodities offer some of the most lucrative and potentially explosive profits anywhere in the investment world. And because simple supply and demand is the key driver for many of these everyday products, it’s a sector ripe for volatility and speculation from hedge funds and large institutions.

Heck, you only have to look at the oil market to see that in action.

It’s not uncommon to see prices cycle from highs to lows and back to highs again in a relatively short time. And it’s this rapid-fire, rollercoaster movement that causes many would-be commodities investors to park themselves on the sidelines, rather than risk their cash.

But this is often a mistake – particularly since there are some quick and easy ways that investors can take advantage of the world’s commodities. So let’s see what 2010 has in store…

Why The Price of Oil Is Headed Back to $100

It wasn’t long ago that oil prices blasted to all-time highs around $147 a barrel (July 2008, to be exact).

But they then set off on a remarkable decline that culminated with the price sinking to lows around the mid-$30 level by early 2009 – a full $115 or so lower than the record high, which equates to a staggering $115,000 move in equity on just one contract.

But as the chart below illustrates, oil has spent most of 2009 busily clawing back a sizeable chunk of the downward move – and I expect that trend to continue in 2010.

Click here for both the oil trends chart and the rest of Mr. Lowell’s article on Investment U.

Original source for this article: Contrarian Profits

By Andrew Snyder, TodaysFinancialNews.com

Baltimore — (TFN): We all have a friend like him. For me it’s a guy named Greg. He has some great ideas and his entrepreneurial spirit runs deep, but for some reason, his plans never seem to make it to fruition. Somewhere from the drawing board to the production line, he runs into a debilitating snag.

Most of the time, it’s money.

He’s got great ideas but nary a penny to his name. That’s why I told him to ring up old Uncle Sam… collect. Washington’s handing out all sorts of dollars these days. He might as well put his hand under the waterfall.

According to the Wall Street Journal, the Department of Energy is handing out some $40 billion just to the so-called “clean energy” sector. Greg needs to paint a tree on his latest invention, call it organic and break into 21st century politics, er, business.

From here on out, it’s not what you know, it’s who you know. With Obama acting as economic maestro-in-chief, it’s a whole new world for us business folks.

Which brings me to a sore subject. You see, I recently told Hot Stock Confidential members to buy shares of a tiny little up-and-comer named Raser Technologies (NYSE:RZ).

Now, before I go any further, I don’t want to hear any complaining that I only talk about my winning plays in Notes, because this one was a loser. A big fat flop. Right now, we’re down 45%. It was one, if not the worst recommendations I made this year.

But I’m not selling. Even though I got plenty of heat from internal and external “forces,” I am still not ready to suck it in and lock in the loss.

I’m not holding out because the company’s got a breakthrough product or is about to get bought out. I’m holding on because Uncle Sam is ready to cut Raser a big ole’ check.

When I initially recommended the company in late August, headlines were abuzz with “green” spending. But then, just as suddenly as it started, it stopped. Congress switched gears to healthcare and Raser shareholders were left in the dust.

But Washington never stays in one place too long. It makes for an easy target. So once again, the clean energy industry is heating up. The article in today’s Journal proves it.

With Stimulus 2.0 ready to be released and the DOE spending like an eighteen-year-old who just unlocked his trust fund, this is a fantastic time for Raser and its geothermal electricity production.

After all, just last week it announced it was applying for a Treasury Department grant that could put $33 million into the company’s coffer.

For a firm with a market value of just $90 million, $30 million can do great things.

This play may not have followed a traditional route and is certainly a move that would make any financial advisor soil his suit, but in today’s financial environment, when the government acts as the lender of choice, traditional rules are out the window.

While fundamental investments still have long-term merits, for us short-term traders and especially us contrarians, some of the best investment opportunities can be uncovered by following the White House press pool.

*** Speaking of money, how about Exxon’s big deal today? For us contrarians, the $31 billion, all-stock deal proves the world’s largest oil producer believes its stock is overpriced and ready to fall.

If you’ve read my work for any length of time, you likely know that I am a big fan of signaling theory. According to the common-sense notion, Exxon’s unwillingness to use any of its massive pile of cash is a sign that company executives feel a $69 share of the company is worth less than $69 in cash.

It is no wonder we are watching shares drop by more than 4.7% today. In the long run, today’s news will boost Exxon’s performance. But in the short term, investors have an awful lot to think about.

By far, the biggest news surrounding this story is not what it will do for Exxon or XTO shareholders, but what it will do to the natural gas market.

It’s exciting stuff, especially for those of us that just racked up triple-digit gains thanks to the industry’s recent meanderings. I’m talking to you TFN Strategic Trader members.

Here’s what I wrote for the TFN site today:

“You don’t become one of the world’s largest and most profitable companies by making dumb moves. Exxon Mobil (NYSE:XOM) proves it once again.

“The Street is buzzing today thanks to news that Exxon is printing some $31 billion worth of new shares in order to purchase XTO Energy (NYSE:XTO), one of the nation’s natural gas producing giants. It’s a major deal that has hearts skipping across a variety of sectors.

“Of course, nobody is as excited as XTO shareholders. They woke up to news of a buyout worth a 17% premium to Friday’s closing price.

“Shares of the oil and gas producer slipped by double-digit proportions over the past few months as natural gas prices slide. But now that demand is rising and gas prices are following suit, Exxon officials saw it was time to make their move. With XTO prices reaching short-term lows, Exxon made its move.

“Now that a major non-conventional gas player is making headlines, investors have their eyes on all sorts of potential buyouts. It’s almost impossible to find a company in the energy industry not trading in higher territory today.

“Two stocks you will hear a lot about over the next couple of weeks are Chesapeake Energy (NYSE:CHK) and Range Resources (NYSE:RRC).

“So far today, Chesapeake is up by over 6%, with shares trading close to $25.50 each. The company, with major holdings in all of the popular shale regions, has been a long-term target of buyout rumors. Maybe this time the speculators will be right.

“But my money is on Range Resources. It is a major player in the Marcellus region that just happened to announce significant expansion in the area this morning. Coincidence? Doubt it. It looks more like advertising.

“Range is the right size for a buyout. With a current market value of $7 billion and another $3 billion or so in debt, a buyout could come with a price tag of just over a third of Exxon’s purchase. Whoever decides to grab the company (think Shell or BP) would automatically get more than 180 Mmcf of daily gas production out of the Marcellus region.

“Of course, this is a long-term play. With gas prices plunging to ultra-low territory in recent months, any company purchasing gas assets now has a long-term outlook. With non-conventional plays hotter than a barroom pistol, major producers like Exxon are flocking to the sector in hopes of finding larger profits than their current low-margin deepwater prospects.

“For all of you fans of deepwater drilling, that is bad news, even horrid.”

Read why here.

*** Hey, lookie there. Gold’s up today. With word that Congress is ready to budget yet another couple trillion bucks, the dollar’s a tad bit weaker today.

As I write, gold is up by $3.70 per ounce and the dollar’s down just $0.0019 against the euro. Doesn’t look like buyers of either asset have much conviction.

Today’s just a short-term turnaround in the recent trend. Expect more strength from the greenback and more weakness from the gold market. By the time we sing Auld Lang Syne in a couple of weeks, gold will be trading for $1050 per ounce. That’s when you should be a buyer again.

Original source for this article: Contrarian Profits

Contrarian Profits brings you the following report from our colleagues at Casey Research:

Marc Bustin Ph.D., F RSC, is the senior researcher for unconventional oil and gas for Casey Research.

Considered to be one of the top authorities in the world, Marc is the go-to expert for multinational oil and gas conglomerates, and is brought in to help evaluate finds around the world. Marc has reviewed more projects on his own than some exploration teams put together.

Recently, at the Casey Research Energy Summit – a two-day event showcasing the top minds in the energy industry – a small group of investors became privy to Marc’s take on the future of natural gas… his prediction for where prices are heading next year… and some of the companies he believes will profit when natural gas takes off.

For an excerpt of Marc’s presentation, read on… Marc Bustin (Casey Research):

What You Need to Know About Natural Gas

Natural gas prices have plummeted. Natural gas storage is at a maximum. Producible gas reserves are up 35% in the United States. Demand for natural gas is down because of the economy.

Then suddenly a new-found U.S. natural gas producible reserve is suggesting that the U.S. in fact will be self-sufficient or close to it as soon as 2030.

Why are all of these things happening?

A bit of it, of course, is due to the drop in the overall economy, but it has a lot to do with the concept of gas shale, and that’s really what we are going to focus on today.

Where does all this gas come from?

The gas comes from organic matter that is within the rocks. It evolves, bacteria work on it, it generates gas, and most of that gas and oil end up in reservoir rocks, such as the sandstone.

But the rocks with which the organic matter is in the first place, are fine-grained rocks that we use the loose word “shale” for. These are the rocks that have the organic matter that’s cooked, that generates the gas. The gas is generated from the fine-grained rocks and it migrates out into our reservoir rocks, which is our conventional gas production.

If we were to look at the shales in more detail with an electron microscope, you would see that it’s very fine grained and the pores are small. If we look at sandstone, the porosity and permeability (the ability of gas to flow through the rock) is great, and that’s why we can produce it at commercial rates. Traditionally we haven’t been able to produce any gas from shales because there are no pathways for the gas to go out at a very fast rate. Until recently we’ve pretty much ignored these rocks.

If we blew up the pore in a sandstone to the size of the Eiffel Tower – by comparison, the pores in shales are about the size of an eyelet on the compound eye of a bee. In other words, they’re really, really small. There’s a tremendous size/scale difference and that’s why the gas tends to be retained.

The reason that gas migrates out of the rocks is that they’re surrounded by water. All the other pores are filled with water, and because gas or oil is lighter than water, there is a buoyancy effect. It migrates until it’s trapped.

But shales are so fine grained, you don’t need a conventional trapping mechanism. The gas does not move out of these shales because of capillary pressures, and also because the gas is actually absorbed into the mineral and organic surfaces.

That means when we find these shales and these types of deposits, they are not localized. They are very, very laterally extensive, so you don’t really have any exploration risk in terms of finding the shale. The exploration risk is really in whether or not you can develop it.

The economically recoverable gas from the shale is now possible due to development and success of horizontal drilling technology – the development of fracking technology. Higher gas prices in the past gave us the confidence and allowed us to develop the technology. A huge factor is confidence. We know we can do it economically, so we are willing to spend the big dollars that are required to drill and frack one of these wells.

Technology has now made it possible to produce gas from rocks that we couldn’t produce gas economically 10 years ago.

In the past we were drilling more and more wells that produced less and less gas. All of a sudden, things have changed with these shale wells. We are drilling fewer wells, and each well is producing more and more gas – because of the frack technology and the wells being horizontal. Things have changed completely.

Finding and development cost

How much it costs to produce the gas, of course, is going to be equivalent to the resource size – the producible resource size. The bottom line is, there’s lots of gas that could be produced at relatively low prices. For example, EnCana’s projection of producible natural gas is absolutely enormous.

What’s happening in the rest of the world?

The rocks are a little bit different in North America than everywhere else, but there certainly are similar shales in Europe. North Africa has wonderful-looking shales, and so do a few other places – Eastern Australia, for example. There is no reason to suspect they won’t be equally successful producing gas from tight rocks in those areas, as we have been in North America.

There are certainly lots of gas shale potentials in Europe and many companies like Conoco, Exxon, Shell are there – Shell is drilling some gas shale wells in Sweden, for example. Other companies are working in England.

So all of a sudden we are looking at a world where natural gas is perhaps not in a shortage anymore.

Part of the problem is, we have been a little bit too successful – if you’re a service company, a drilling company, or a producer in North America. We’ve been so successful in finding gas,  we’ve driven the price way down. The price, in fact, has been too low to sustain drilling and, in some cases, production.

We’ve got a market, we’ve got demand, and we have supply. U.S. natural gas storage is at a maximum. We’re filled up; no more natural gas, please… for the time being at least.

So what does it mean for the price of natural gas?

Since gas prices have taken a major dive, so has the rig count. The rig count is how many rigs are actually drilling. Currently in North America, we’re probably at a 35% to 40% usage of the rigs. This is way down, and the implication is important for the gas price.

Low gas prices means, suddenly we’re drilling a lot fewer gas wells. No one wants to drill anymore.

Currently, in order to maintain U.S. production, we have to add between 17, 18, 19 Bcf (billion cubic feet) additional gas per day. At the current rate of drilling, we’re adding 9 Bcf a day production, so there’s obviously a shortfall.

And a shortfall means eventually the price of gas has to start going up.

Right now, there are a huge number of drillable wells – prospects all ready to be drilled. As soon as the natural gas price gets up above a certain level, these wells will suddenly become economic, and people will start developing them.

So it’s not like we are going to find new “stuff,” we’re just going to start producing the “stuff” we already know exists.

Which companies are going to lose and which are going to win with the new metrics of natural gas?

Losers:

• Gas-weighted companies are in trouble today.
• Small companies with debt, I think are finished – if they’re gas producers.
• Companies only operating in North America are going to have a tough time. If you’re offshore, you’re probably in a lot better shape.
• Companies with no technical expertise – producing gas from shale requires a team of people who actually understand what they’re doing.

Most small companies just can’t play in that sandbox. When things go bad, they go bad. You have to be able to drill a number of wells successfully to be successful. If you can only drill one well and you have no operational experience, you should just take your wagon and go home. That leads me to the winners.

Winners:

• Big companies with some capital to play with.
• Companies with operational experience, or companies that have the depth to develop that operational experience.
• Companies with early land position and low finding and development costs or finding and exploration costs.
• Technically competent companies.
• Small companies who have decent land and have big-company partners.

Some small companies got an early land position, opening the door for big companies to farm in on them. These are perfect situations. The big company is paying the load, and the small company will still get the advantage.

My prediction for gas prices

In my opinion,  gas will be $6 or $7 next year. Prices will then soften down to $4 or $5 at the end of next year. Ultimately, the best buys for investors will be small-caps that are farmed out or big companies that have long-term positions.

As mentioned before, Dr. Bustin’s expertise in unconventional gas and oil is unmatched in the industry. If you’re interested in receiving Marc’s entire presentation from the Casey Research Energy Summit… learning from his considerable acumen in natural gas… and getting the scoop on which stocks he believes are poised to profit from the inevitable increase in gas prices, here’s your opportunity.

What’s more, you’ll also get the inside perspective of every energy expert at the summit – on subjects ranging from alternative energy to oil and natural gas, to lithium.

The information revealed at the Casey Research Energy Summit has been, up until now, only available to the small group of investors in attendance.

Now you, too, have the opportunity to arm yourself with the knowledge you need to prosper in the challenging years ahead. Click here for details.

Original source for this article: Contrarian Profits

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