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Energy for the Long-Term
by Steven Goldberg

Light crude oil futures briefly touched $45-a-barrel today and most energy stocks are trading at or near their 52-week highs.

As a value investor, I wouldn't bet on oil and gas stocks rising much in the near future. Nor would I wager on oil prices continuing their seemingly endless climb.

But I think there's strong, long-term case to be made for energy stocks -- one that I've been arguing for since last March.

The reason: Supply and demand are still out of kilter in the energy patch, as well as among other basic materials.

Even if oil prices fall to $30 a barrel from here, they'll be high enough to spark new exploration. Growing demand for oil and other raw materials, especially from China, is leading to long-term growth in the production of these materials.

That, in turn, means higher profits for energy-service companies -- the companies that supply everything from drilling equipment to sophisticated technology needed to locate and extract underwater oil and gas.

A long-term imbalance

The major oil companies simply haven't spent much in recent years on finding and developing new sources of oil and gas. The same is true for other basic materials. "We have a classic case of more demand than supply, an imbalance that will take years to resolve," says Steve Leuthold of the Leuthold Group, a Minneapolis-based investment research firm.

The basic materials sector of the S&P 500, which includes energy stocks, was 40% of the index's total value in 1980. Today it's still less than 10%. It's not going back to 40%, but 10% is too low.

That low market value has meant that energy and other basic material companies have had few dollars to invest in research and development.

Energy picks

One of the best choices for a pure energy play is Vanguard Energy (VGENX). But my favorite fund in this sector is T. Rowe Price New Era (PRNEX), which invests in a broad mix of energy and other basic material stocks. Manager Charles Ober has been following the sector since 1975.

Ober's top energy holdings include ExxonMobil (XOM), BP (BP), ConocoPhillips (COP) and Devon Energy (DVN).

But he also owns Newmont Mining (NEM), the gold-mining firm; Nucor (NUE), the steel mini-mill company; and International Paper (IP).