Thomas A. Petrie, co-founder of Petrie Parkman & Co., a Denver and Houston based energy investment firm, is a former Managing Director and Senior Oil Analyst of The First Boston Corporation.
Prior to joining First Boston, Mr. Petrie was an Oil Analyst with Wainwright Securities and Colonial Management in Boston. For eight consecutive years , Mr. Petrie was ranked the number one oil analyst in the exploration/independent sector by Institutional Investor magazine's annual survey of money managers. During his career, Mr. Petrie has also been an active advisor on more than $100 billion of energy related mergers and acquisitions, including many of the largest.
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Geopolitics matter.
The variable effectiveness and changing policies of the Organization of Petroleum Exporting Countries (OPEC) as well as the major consuming nations can shape the energy sector's overall investment attractiveness.
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Always remember the business is cyclical.
While there are longer- term secular trends in terms of demand growth and supply additions, the industry's overall importance to broad measures of economic performance periodically results in pronounced cyclicality.
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The best cure for low oil and gas prices is low prices and vice versa.
History shows that $10.00 /bbl oil begets $25.00/bbl oil and, conversely, sharp upward moves to $30.00+/bbl oil are usually unsustainable. Low prices tighten supply versus demand; high prices do the opposite .
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Contrarians are periodically highly rewarded.
When consensus is clearly negative about energy commodities the stocks are often excellent buys (i.e. 1986 and 1998); when consensus is uniformly positive watch out (i.e., 1979-1980)
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Good exploratory well news travels fast; bad news often seeps out slowly.
When assessing the impact of high potential exploratory drilling, it seems that slowly developing announcements of results seldom match positive expectations. Remember the adage "buy on expectation potential; sell on actual announcement."
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High financial leverage with typically high energy commodity price volatility can be a deadly combination.
Most energy company bankruptcies result from ill-timed uses of debt to acquire or develop production in anticipation of a commodity upswing that fails to materialize on schedule. Accordingly , corporate strategies emphasizing financial leverage are often a risky bet.
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Quality of management does matter.
Significant capital destruction is not an uncommon occurrence among energy companies; accordingly, managements that exhibit consistent financial discipline in the capital allocation process often merit a premium.
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Technology counts.
Many companies in the energy sector are often viewed as 'old economy' stocks. Nevertheless, the role of 'new' technologies in unlocking energy resources more efficiently and at lower costs is critical to corporate success.
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Stock repurchases deserve attention.
In the 1950s and 1960s J. Paul Getty validated the idea that recapturing the barrels of oil equivalent behind outstanding common shares could be financially preferable to drilling new discoveries. In the 1970s and early 1980s Boone Pickens developed a variation on this idea. Thus, an astutely executed corporate stock repurchase program can provide a useful clue to a company's investment attractiveness.
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Beware of popularized alternative energy concepts.
While diversification away from conventional hydrocarbon sources is undoubtedly both desirable and inevitable, the path to uncovering profitable and viable alternative energy enterprises is likely to be as tortuous and risky as many other sectors involved in pursuing technological innovation have also demonstrated.
