Gold or black gold?
Take your pick, or buy some of each, as it looks like the precious metal and oil will be rocking over the coming months. Rising tensions over oil supplies from the Middle East have created a scenario in which gold and gold stocks should rise along with energy shares.
Gold is a good bet because investors have historically seen it as a safe haven in times of political and economic uncertainty. Oil is buoyant because a threat to its supply will drive up demand from other sources and, in turn, prices, which improves profit margins for companies in a position to make up the difference.
Oil prices are up 9 percent this year, worldwide, while gold rose6 percent in the month following the European Union’s announcement Jan. 23 that its members would embargo Iranian oil imports beginning July 1.
“Depending on the headline, the prices of gold and oil become more volatile as rhetoric and tensions with Iran escalate,” S&P Capital IQ said in a research note. But “investors could position their portfolios to potentially benefit in the longer term.”
The contretemps began over possible military dimensions to Iran’s nuclear program and that prompted European Union members to call for an embargo. About 18 percent of Iran’s oil exports supply the continent.
Iran countered by threatening to cut supply to six EU members before their embargo was to begin. A few weeks later, on Feb. 19, Iran said it was turning off the spigot for Britain and France immediately, but those two countries get little of their supply from Iran.
Now, Iran’s latest gambit is to threaten to shut down the Strait of Hormuz, a transit site for 20 percent of the world’s oil.
Stewart Glickman, S&P Capital IQ’s head of energy-sector research, said that “much of the Iran-based headline risk may already be priced into the price of oil.”
However, in the unlikely event that Iran did close the Strait to trade, oil prices would likely move higher to as much as $200 a barrel from the current $108, but only for a short time. But in a worst-case scenario, “an unlikely months-long closure of the major trade route (would be) potentially volatile for large U.S. oil companies” since so many get supply via that route. It would also threaten to push many Western economies into recession .
In any event, U.S. refiners with the capability of processing the domestic benchmark West Texas intermediate (WTI) crude oil “will benefit from higher margins as they will use a lower-cost feedstock while still obtaining the same refined product price,” said S&P analyst Tanjila Shafi, citing three stocks, which are outlined below.
Glickman said that even a modest rise in oil prices from current levels will benefit the biggest integrated U.S. oil and gas companies, three of which are also reviewed below.
As for gold, S&P analyst Leo Larkin argues that “investing in select gold companies under a scenario of a European embargo of Iranian oil could be a better bet than black gold.”
Larkin predicts gold will reach $1,900 per ounce by year-end, a 6.3 percent premium.
“On a fundamental basis, I remain positive on the gold industry in 2012. With the Fed and other central banks committed to a zero interest rate policy on short-term money, the opportunity cost for holding gold is nil,” he said, and another positive going for it is as an inflation hedge.
Larkin cites three big gold miners he says are likely to prosper with the rising price of gold. They are summarized below. He also said investors looking to diversify their gold holdings should consider gold exchange-traded funds.
Here are three gold-mining stocks and six oil stocks that S&P Capital IQ analysts say will likely benefit from the current world oil supply scenario:
Company profile: HollyFrontier, with a $7 billion market value, is an independent domestic oil refiner that owns and operates five refineries. It also owns a one-third stake in Holly Energy Partners, an oil pipeline company.
Dividend yield: 1.34 percent
Investor takeaway: Its shares are up 40 percent this year and have a three-year average annual return of 44 percent. Analysts give its shares six “buy” ratings, six “buy/holds,” and six “holds,” according to a survey of analysts by S&P. S&P has a "hold" rating on its shares, down from a recent “strong buy,” on valuation concerns.
8. Marathon Petroleum
Company profile: Marathon Petroleum, with a $15 billion market value, is a domestic oil refiner, with marketing and transportation operations primarily in the Midwest, Gulf Coast, and Southeast.
Dividend yield: 2.41 percent
Investor takeaway: Its shares are up 26 percent this year. The company doesn’t have a long-term performance record because it went public in the past 12 months. Analysts give its shares eight “buy” ratings, five “buy/hold,” and two “holds,” per S&P, which holds a $49 price target, a 17 percent premium. Marathon Petroleum is projected to earn $5.10 per share this year and grow 10 percent next year.
7. Valero Energy
Company profile: Valero Energy, with a market value of $14 billion, is the largest independent U.S. oil refiner and operates 15 refineries including in Canada, the U.K., and Aruba.
Dividend yield: 2.45 percent
Investor takeaway: Its shares are up 17 percent this year and have a three-year average annual return of 9.7 percent. Analysts give its shares six “buy” ratings, five “buy/holds,” seven “holds,” one “weak hold,” and one “sell,” S&P says. S&P itself has a “buy” rating and a $28 price target on its shares, a 12 percent premium.
6. Barrick Gold
Company profile: Barrick Gold, with a $48 billion market value, is the world’s largest gold producer.
Dividend yield: 1.26 percent
Investor takeaway: Its shares are up 5.8 percent this year and have a three-year average annual return of 18 percent. Analysts give it 10 “buy” ratings, eight “buy/holds,” and six “holds,” an S&P survey shows. S&P has a “strong buy” rating on its shares with a $77 price target, a 60 percent premium. The company’s CEO said he expects Barrick will continue to increase dividends aggressively given the bullish outlook for gold. Chief Executive Aaron Regent made the comments at an investor conference in Florida. Over the last five years, Barrick has increased its dividend by about 170 percent, including a 25 percent increase last October, to 15 cents a share quarterly.
5. Newmont Mining
Company profile: Newmont Mining, with a market value of $30 billion, is the world’s second-largest gold producer.
Dividend yield: 2.36 percent
Investor takeaway: Its shares are down 1 percent this year, but have a three-year average annual return of 14 percent. Analysts give its shares four “buy” ratings, six “buy/holds,” and 11 “holds,” according to a survey of analysts by S&P, while S&P has a “buy” rating on its shares with a $76 price target, a 21 percent premium.
4. Randgold Resources
Company profile: Randgold Resources, with a market value of $10.6 billion, has huge gold mining operations in West and East Africa.
Dividend yield: 0.16 percent
Investor takeaway: Its shares are up 12.4 percent this year and have a three-year average annual return of 36 percent. Analysts give it two “buy” ratings, one “buy/hold,” and four “holds,” according to a survey of analysts by S&P. S&P has a $140 price target on its shares, a 20 percent premium.
3. Exxon Mobil
Company profile: Exxon Mobil, with a market value of $409 billion, is an integrated oil and gas company that explores for, produces and refines oil around the world at 36 sites.
Dividend yield: 2.07 percent
Investor takeaway: Its shares are up 2.6 percent this year and have a three-year average annual return of 11 percent. Analysts give its shares nine “buy” ratings, three “buy/holds,” 10 “holds,” one “weak hold,” and one “sell,” S&P says.
Company profile: Chevron, with a $217 billion market value, is an integrated energy company with exploration, production, and refining operations worldwide. It is the second-largest oil company in the U.S., behind Exxon Mobil.
Dividend yield: 2.97 percent
Investor takeaway: Its shares are up 3.3 percent this year and have a three-year average annual return of 25 percent. Analysts give its shares 13 “buy” ratings, seven “buy/holds,” five “holds,” and one “weak hold,” according to a survey of analysts by S&P. S&P has its shares rated “strong buy.”
Company profile: ConocoPhillips, with a $100 billion market value, is an international integrated energy company.
Dividend yield: 3.45 percent
Investor takeaway: Its shares are up 6 percent this year and have a three-year average annual return of 31 percent. Analysts give its shares four “buy” ratings, four “buy/holds,” and eight “holds,” per S&P, which has the shares rated “buy.”
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