TAKING STOCK

Don't waste your energy on oil partnership

by Malcolm Berko

Dear Mr. Berko:

My financial adviser wants me to buy into a private oil-drilling limited partnership. He and seven other clients (nine of us) will each sign a personal note for $100,000 plus invest $15,000 in cash. The lead partner will take the nine $100,000 notes to his bank and borrow $80,000 from each, which includes two years of interest on the note. The wells are in a proven field, so there's little risk. My adviser says this is the best way to participate in the rise in oil, which he believes will go to $200 a barrel. I would like to participate in the profit potential of rising oil prices. Do you think this is the best way to do it or would you recommend another way? The proven reserve field is in Texas and an easy drive from my home here in San Antonio so I can check on it whenever I want and see how it's doing.

R.S.
San Antonio

Dear R.S.:
Your adviser may be right about one thing: oil could run up over $200 a barrel. Goldman Sachs believes that $200 barrel oil "could be a reality in the not-too-distant future if we have a major disruption!"

But I'd not go near that limited partnership with a bazooka. It reads very much like something a reader from Portland, Ore., got sucked into 18 months ago. Seven investors, encouraged by their broker signed notes for $50,000 each and also invested $7,000 in cash to drill in a proven field somewhere in Texas. A year later, the driller went belly-up and the investors were left holding a note with the lending bank demanding $44,000 from each of them. The broker worked for a large New York Stock Exchange firm that had no idea their representative was involved in the deal. So when four of the investors threatened to publicly expose the broker and his firm to the media, the broker found the money to cover the loans and repay the investors.

In your case, I suspect your broker split each $15,000 cash investment with the general partner and also got 20 percent of the borrowed money. Stay away from this deal ... it smells like you would be sticking out your neck!

An easier way to participate in the oil business is to own Nabors Industries (NBR-$39.86), which is the largest land drilling contractor in the universe. NAB owns 620 land drilling rigs, 608 land work-over and well-servicing rigs, 71 offshore rigs and 31 supply boats. And since the oil crisis of 1991, revenues and net income have increased fifteenfold, capital spending has grown tenfold and profit margins have doubled. This $5 billion revenue company has 25,000 employees and Third Avenue Fund and Fidelity Funds, own 10 million and 12 million shares, respectively. RBC Capital Markets and JP Morgan Chase, rate NBR as a "buy" while Leeb Capital Management believes NBR could trade at $75 in the coming 18 months. So put $5,000 of the $15,000 into NBR.

Then peek at United States Oil Fund (USO-$101.22), which was born as an exchange-traded fund in April of 2006 at $68 a share. USO strives to duplicate the performance of West Texas intermediate, light, sweet crude oil. It invests in future contracts for WTI light as well as heating oil, gasoline, natural gas and other petroleum-based fuels that trade on the commodity exchanges. USO has a low 0.50 percent expense ratio and during the past 12 months the shares have traded between $48 and $99 a share. Buy 50 shares of USO.

Finally, buy 50 shares of ExxonMobil Corp. (XOM-$89.70) the largest public oil company in Irving, Texas. XOM has 29 billion barrels of oil and natural gas reserves at a cost basis of under $6 a barrel. XOM's $1.60 dividend, which yields 1.7 percent, has been increased every year since 1990. Meanwhile, management has been aggressively buying back its shares on the open market, suggesting that it's a lot easier to purchase reserves than drill for them. Value Line believes XOM could trade at $120 and aficionados seem to think that XOM may be ready to do a two-for-one split this year. But don't count on this split.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
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