Windfall Profits Tax

Windfall Profits Tax: Exxon's Shopping List
by Byron King
The Rude Awakening
Wall Street, New York
Thursday, November 11, 2005

In the face of the potential Windfall Profits Tax on oil companies, Byron King tells us what they can do to avoid being hit by it.

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[Joel's Note: Who would not be excited at the prospect of
feeling every molecule in your body vibrate due to a
massive explosion? This is the promise that was contained
in an email your venturesome editor received this morning
from Whiskey and Gunpowder's Byron King.

We are to leave our comparatively mundane office
surroundings this afternoon for Titusville, P.A. Here we
will witness what is know in the industry as 'shooting the
well." As I understand it, this involves an oil well, a
large amount of explosives and a few enthused and spirited
onlookers.

It is no secret that there is an abundance cash to be made
by following the ebbs and flows of the oil industry. If you
happened to miss the special Rude Awakening Investment
alert last night, be sure to check it out here:

http://www.agora-inc.com/reports/RTA/ERTAFB23

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Eric Fry, reporting from Wall Street...

After enduring weeks of bone-numbing volatility in the oil
stock sector – along with days of mind-numbing oil-company
inquisition by Barbara Boxer and the rest of the Senatorial
brain trust – many investors may have lost the urge to
invest in energy stocks. But the volatility will subside
eventually, we promise, and the inquisitors will find a new
bogeyman, eventually.

Thus, at times like these, it pays to bear in mind that
adversity often sows the seeds of opportunity. Perhaps, for
example, the proposal to tax the "windfall profits" of oil
companies might inspire oil companies to reduce their
windfall profits. "If the major oil companies must chose
between investing their cash or losing it to taxation," we
reasoned in Tuesday's column, "we should expect merger and
acquisition activity within the energy sector to ramp up
quickly."

With this thought in mind, we asked you, our faithful – and
trustworthy - Rude Awakening readers, to identify mid-sized
oil companies that would be attractive acquisition targets
for a larger oil company...And you enthusiastically
responded with some excellent ideas. (We also tossed the
question to Byron King, contributing editor of Whiskey and Gunpowder.
Byron also enthusiastically responded with some terrific
ideas and insights of his own...which he shares his in
today's column).

After wading through all the responses from Rude readers,
we identified 35 unique stock ides, many of which received
multiple endorsements. Domestic natural gas stocks topped
the list of prospective takeover candidates. Steve Heraty
of San Diego, California, expressed the logic that seemed
to inspire these picks:

"A few years back BP - British Petroleum - took out Amoco
mainly for their huge U.S. gas reserves and acreage
positions. The majors do not want to be left out of
increasing their stake in long-lived domestic Natural Gas
reserves. There will be a lot of money made in this area
over the next few years. LNG or liquefied natural gas
accounts for only 2 to 3 percent of supply right now. So to
get domestic gas you grow by acquisition of dominant
players like...Anadarko Petroleum, a company with large,
domestic natural gas reserves. Bottom line, in the energy
sector, companies are looking to acquire quality domestic
natural gas assets."

In addition to APC, the other popular takeover candidates
in the natural gas sector included Apache Corp (APA),
Burlington Resources (BR), Southwestern Energy (SWN), Ultra
Petroleum (UPL) and Devon Energy (DVN). North of the
border, many readers identified Encana (ECA) as an
attractive target, along with a couple of lesser-known oil
sands companies like OPTI Canada (OPC.TO) and UTS Energy
(UTS.TO). The third group of favorites featured small U.S.
refining companies like Frontier Oil (FTO), Murphy Oil
(MUR) and Holly Corp. (HOC).

The Rude readers suggested several more prospective
takeover targets, many of which Byron King discusses in the
following essay (and some of which might become the topic
of a future essay).

Thanks again for your enthusiastic and insightful
responses...Let's do it again sometime!

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EXXON'S SHOPPING LIST?
By Byron King

In boom times, oil companies are supposed to be out in the
field, drilling for oil & gas. But when oil companies
actually make some money in the biz, the folks on Capitol
Hill believe that they should be drilling the oil
companies. It is all politics, if not showmanship. And you
know the script. Haul the big-shot execs up to the long
green table in some dark-wooded chamber, and rip them apart
for the benefit of the unblinking cameras. It's the
American way. So what is a prosperous oil man to do? Stash
the cash, of course. But first, we have to study a bit of
history.

In 1980, at the peak of the oil boom of that era, the oil
sector made up about 28% of the Standard & Poor's
composite. Starting in 1981, the price of oil began to fall
from about $48 per barrel (in then-dollars, equivalent to
over $90 now). Much of that fall in price had to do with
the arrival of massive, new oil production from Alaska and
the North Sea, among other places.

Just a few years later, oil was selling for as little as
$6.00 per barrel, during a few lowly weeks in 1988. Along
with the fall in the oil price, the oil-stock sector
dropped to about 7% of the S&P. Today, in this booming,
bubbly, frothy economy of ours, the oil sector is still a
mere 10% of the S&P. So will history repeat itself?  Heck,
I dunno. But it might rhyme, and therein lies the
opportunity for the forward-looking investor.

Windfall Profts Tax: Where to Stash the Cash

I said, "stash the cash." Where? Well, the usual items come
to mind. The big oil companies might (and ought to!!) raise
dividends to shareholders. It's about time. Closer to home,
oil companies will let their internal costs rise, with
salary increases, fancier offices and maybe a few more
corporate jets. Good for housing in the tonier parts of
Houston, maybe. And it might be OK for Gulfstream, but
let's look beyond these minor ripple effects.  

Oil companies will also surely hire more personnel, if they
can find enough technically qualified people graduating
from the depleted ranks of the nation's geology and
petroleum engineering programs. Lastly, if history rhymes,
we are going to see a blowout of spending within the oil
service sector, as well as oil company takeovers, better
known as "drilling for oil on Wall Street." By the time the
politicians get around to enacting any so-called "windfall
profits tax," there will not be many windfall profits to
tax.

What are a few of the prime takeover targets? Among the
larger independents, keep an eye on Anadarko (APC), Apache
(APA), Devon Energy (DVN), Forest Oil Petroleum (FST) and
Kerr-McGee (KMG). Whether these guys get taken out or not,
they are all superior-quality companies with great
management and terrific levels of technical competence. 
They will make money on their own, takeover or no, and do
very well in the coming years.

Further down on the food chain of independent oils, and
still on the A-list of quality companies, look at Denbury
Resources (DNR), Pioneer Natural Resources (PXD) and one of
my favorites...Talisman Energy (TLM). Each one is a gem in
its own right.

Windfall Profits Tax: OIH

You still want more? Where else to look? There is nothing
wrong with the Oil Service HOLDRs Trust (OIH). It is a
composite of many of the best companies in that segment of
the industry. As the sector rises, OIH will benefit.

If you are a service-stock picker, one of the best vendors
of the machinery that controls oil flow, and prevents
blowouts, is good old FMC Corporation. FMC sells some of
the very best flow control technology in the world, with
long waiting lists of customers ready and willing to pay
high prices for its products. And in terms of smaller oil-
service companies, two of my "gold standards" are Lone Star
Technologies (LSS), supplier of high-strength tubular goods
to the oil wells of the world, and Core Labs (CLB), the
world's finest provider of analysis and systems for
enhancing ultimate oil recovery from the world's depleting
oilfields.

So there you go, Eric. If you can't use these guys as a
basis on which to build a portfolio of companies that will
be trading up as the majors spend down their cash, then my
suggestion is to buy gold and wait for the end of the
world.

Yours from the Pennsylvania oil patch, where it all started
in 1859... Byron King.

[Joel's Note: Byron is part of the esteemed editorial team
contributing to Whiskey & Gunpowder, a FREE e-letter that
tackles subjects such as peak oil, personal liberties,
geopolitics and history of warfare. Receive this valuable
resource for free by clicking here:

http://www.whiskeyandgunpowder.com/Sub/RAopt.html

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[Joel's Note: Be sure to check your inbox over the weekend
to 1, check that I have survived the 'shooting of the well'
up on the Pennsylvania oil patch and 2, to grab your Rude
Weekend edition containing all this week's articles. In the
meantime, all the best for Veteran's Day and a safe weekend
to you.

Cheers,

jOEL