Time to Shun Big Oil
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- Published on Thursday, 21 June 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
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If you have not already done it, now is the time to eradicate Big Oil from your portfolio. There is a much smarter alternative.
If you believe the mainstream hype, Big Oil lives in a fantasyland of easy money. Gold coins fall from the clouds and hundred-dollar bills sprout from the trees.
Don't fall for it. Times are tough.
The truth is Big Oil works in the same politically twisted and economically manipulated world that you and I are forced to drudge through.
That's why you need to shun these companies and kick them out of your portfolio. They're old-school plays. Forget about them and move to the next generation of dominators.
The problem is Big Oil is stuck in an outdated business model. For generations big was better, but not now -- not when politicians run the economy.
This fact is the reason BP (BP:NYSE) is taking major heat from its shareholders. The owners of the company want change, but executives have failed to deliver.
In this environment, change is virtually impossible. BP and its Big Oil brethren are political targets. They are so big, every move they make is sliced, diced and tossed under Washington's microscope.
Virtually nothing survives the process.
That means Big Oil needs to shrink or suffer through the mediocrity.
Here's an example of what I mean.
BP's downstream business (refining and chemical production) is full of potential. It's the perfect asset to balance the company's business. When crude prices fall... the refining business' surging margins keep profits flowing.
But foreign competition and domestic regulations are killing BP. New refineries have popped up in places like India and throughout the Middle East. They are more efficient. They are bigger. And they can sell their products at a much lower price.
It's bad news for BP. It's stuck with outdated and inefficient plants spread mainly throughout Europe and the United States -- the hotbed of government regulation.
While the competition builds its way to profits... BP gets wrangled in an impossible permitting maze.
It's the reason we haven't seen a new refinery in the United States in 35 years.
The only other option, some shareholders say, is to sell the refining business and give the proceeds to shareholders. The assets are worth about $20 billion.
But buyers aren't lining up. Nobody wants to deal with the regulatory gauntlet -- not when they can head to a developing country and walk down a red carpet.
That's why another group of shareholders says to let the refining business go where it will and push forward with acquisitions.
The problem with this angle, just as we showed yesterday with Exxon's European woes, is politics.
BP is good at offshore drilling and it knows the business well... but you can bet your last dollar the company won't be allowed to jump headfirst into America's deepwater oilfields.
I've also heard rumors that BP may soon swoop into America's shale boom in an even bigger way, using its deep pockets to grab a slew of the companies that are broke because natural gas prices have dipped so low.
But again, the fracking industry and the regulators that control it will be far from excited to see more of BP's drills roll into town. It's a public-relations nightmare.
What's worse, though, nobody is making money drilling for natural gas. If BP doubled down on the sector, it'd be taking a huge gamble that prices will rise. And right now shareholders aren't looking to gamble.
It's the same situation all across the industry.
ConocoPhillips (COP:NYSE) recently spun off its refining business. Same thing for Marathon Oil (MRO:NYSE).
Big Oil is getting smaller... not bigger. So why would you invest in an industry with a strategic goal of shrinking? It's dumb.
That's why I recently told Unconventional Wealth subscribers about an "energy" company like no other. No matter how high or low oil or natural gas prices go... this company will dominate.
And better yet, thanks to a legal loophole, it owns the ultimate resource monopoly.
As I promised all week, later today we will send you an email with all the details you need to know about this company and its dominance in what I call "reverse mining."
If you're looking for a Big Oil alternative... this is it.
From the Inside,
Aaron
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