One Way To Play Oil

With oil hitting $100 a barrel, should you be jumping onto this bandwagon -- or jumping off?
Try talking to fund manager Ken Heebner instead.

He's been beating the street for around 40 years. So when he says he's found an oil play that "may be the biggest investment I've ever seen in my life," it makes me sit up and take notice.
Mr. Heebner trounced the rest of Wall Street last year. His CGM Focus Fund soared 80%. (I own CGMFX in my portfolio).

He is an oil bull, and remains so even with oil piercing such exalted levels. "I think the overall picture is one where oil is going to remain elevated, with an upward bias," he says.
His fund is betting that way. When we sat down recently for an end-of-year conversation, he conceded that if oil prices fell "I'd need a new portfolio."

But while Mr. Heebner is betting on oil, it's notable that he's been looking beyond the big headline stocks like ExxonMobil and Chevron.
Instead he's found ways to play the oil boom that have kept him ahead of the pack.
Like Vimpel Communications, a Russian cellular company, which is benefiting as that country's oil and gas bonanza feeds through into consumers' wallets.

And fertilizer companies Mosaic and Potash of Saskatchewan. Both skyrocketed last year. Yes, the fertilizer business is raking in cash thanks to rising food demand from places like China. But there's an oil story too. High gasoline prices have driven up demand for ethanol fuel additives, and that's having big knock-on effects throughout agriculture, Mr. Heebner notes.

But the jewel in his crown right now? Petroleo Brasiliero, a.k.a. Petrobras.


The reason: The vast Tupi site it's exploring off the Brazilian coast. Mr. Heebner has been following the progress closely. He thinks Wall Street, and the rest of the oil industry, has yet to appreciate the potential fully. "This could be the biggest oil find in history," he says. "I'm seeing maybe the biggest investment I've ever seen in my life."

And although the Petrobras share price has more than doubled in the last year, Mr. Heebner argues it's still cheap compared to the potential.

Mutual fund regulations prevent CGM Focus from investing more than 5% of its money in Petrobras (although the stake can rise from there if the share price does).
Those looking for some oil action might be tempted to buy the stock. Obviously, individual equities come with the usual health warning. That's especially so for those based in emerging markets and engaged in long-term exploration.

The Brazilian government owns a controlling interest in Petrobras. Some, including Mr. Heebner, think that's a net positive for the company: The state has an economic incentive, after all, to treat Petrobras well. But of course such an arrangement can also be an awkward one. The interests of politicians don't always coincide with those of the stockholders. You can imagine scenarios, for example, where the company has its arm twisted to give away fuel cheaply shortly before an election. As usual, caveat emptor and keep your eyes open.

If you want a real gamble, take a look at out-of-the-money Petrobras call options.
These let you take a long-odds wager that the shares will skyrocket still further in the next year. You get the upside if the stock goes to the moon, but you lose your stake if it doesn't.
View call options like a lottery ticket. They're all or nothing. So you'd only ever wager a tiny amount.

Petrobras shares have leapt nearly 150% in a year to $117.58 recently. The January, 2009 call options at $155 cost $4.60 -- which means the most you can lose is $4.60, but if the shares rise above $159.60 you start making pure profit. (Early Friday, those $155 calls skyrocketed to $12, making them far too expensive. But you could consider the January 2009 $165 call options, which were trading at $6.50. That means you could lose up to $6.50 per option, but if the shares rise above $171.50 you start profiting.)

It's not a trade or an investment. It's a pure flutter.

Write to Brett Arends at brett.arends@wsj.com