Everyone goes on and on about Exxon and its profits. It’s understandable given that people pull up to the gas station underneath signs that says “Exxon” or “Mobil” or “Marathon” etc. The consumer equates high gas prices with those names.

But as an investor- it pays to look away from those big names. Sure, Big Oil is making a lot of money. But it’s the smaller explorers that are making even more.

The exploration and production companies are in business to simply find oil and natural gas and get it out of the ground. The companies then sell it to other companies who refine it etc.

For these companies, their main product, crude, has doubled in price over the last year.

What happens to any company whose product doubles in a year? Their profits soar.

Devon Energy (DVN) reported today and saw record cash flow of $2.6 billion. The company easily beat the Street’s estimates by 41 cents a share.

Mariner Energy (ME) had the same story in the first quarter. Revenues up 49% over a year ago. Earnings per share rose 82%.

Stone Energy (SGY) saw $2.22 a share compared with 38 cents a share a year ago.

These are stunning gains.

For many of these companies, the average price per barrel was around $95 in the first quarter. Average natural gas prices were around $8.25 per million British thermal units. For the second quarter, crude is averaging over $100 a barrel. Natural gas is averaging over $9. Right now, natural gas is over $11 and could head higher.

What will these companies do in the second quarter?

They are cash cows. Money is flowing like there is no tomorrow.

Of course, the party will end at some point for these companies. Crude and natural gas prices WILL decline. But for right now- it’s not ExxonMobil that is making all the profits. It’s the explorers.

The next time you pull up to an Exxon station and curse, maybe you should be cursing Anadarko Petroleum or Apache instead.

Nah…not as fun.

If you’re watching the earnings during earnings season, many companies have been meeting or slightly exceeding estimates.

We’ve heard some bad news- specifically from GE and, now, Starbucks. The economy is slowing and the restaurants and retailers are going to have a hard time of it.

But the food and natural resources companies are all booming. They’re not just beating estimates, they’re beating it big.

Potash (POT), the Canadian fertilizer company, reported earnings this morning and, despite estimates rising over the last few weeks, still beat by 22 cents.

Potash said surging global food demand led its first-quarter net income to more than double to $566 million, or $1.74 per share. From the AP:

The Saskatoon, Saskatchewan-based company raised its second-quarter earnings per share estimate to a range of $9.50 to $10.50, up from its previous forecast for earnings per share in a range of $6.25 to $7.25.

The company raised its guidance based on “surging global food demand.”

Plastics? That was the 1970s. Right now, it’s fertilizers and farming.

Freeport McMoran (FCX) reported yesterday and doubled its sales from a year ago. Also saw profits soar. The company beat estimates by over 60 cents. From the AP:

Net income rose to $1.12 billion, or $2.64 per share, in the three-month period that ended March 31, compared with $476 million, or $2.02, a year earlier.

Quarterly sales jumped to $5.67 billion from $2.25 billion.

“Given the very strong prices for copper, gold and molybdenum, it was a great quarter for us,” Freeport Chief Executive Richard C. Adkerson said in a conference call with analysts.

Molybdenum is an element that’s used in steel, cast iron, and metal alloys to enhance strength, toughness, and resistence to corrosion.

What’s going on here? I thought the world was in a recession? If so- there is no reason copper prices should be near record highs. And steel demand should be slowing, not growing.

Maybe there is NO recession in the rest of the world except for the United States?

Neither Potash nor Freeport is seeing a global slowdown.

Something to keep in mind when investing. The sales, and profits, from overseas have been very, very good for most companies this earnings season.

The place to be appears to be in food and natural resources. If that is true, then maybe the global boom will go on- just without the United States.

(The author of this article owns shares in both Potash and Freeport McMoran.)

Slowly, the “plans” are trickling out from our elected representatives.

How will they “save” us from high gasoline prices? Americans should no of no tough times. No belt tightening. No conservation. Cheap gasoline is our right.

Right?

I’ve heard of at least one “plan” - which is to suspend the federal gasoline tax for two years. To make up for the shortfall, the oil producers would face a special “profit” tax.

That makes sense, right?

Tax the companies who are spending billions of dollars to find the crude.

It’s getting increasingly expensive to find new crude. The Alberta Oil Sands has the second largest reserve in the world but many of the smaller exploration companies are bowing out of the race to explore there because the costs are so enormous. They can’t make any money.

Jim Jubak, on MSN’s Money, explains the problems facing the Russians:

Russia’s older west Siberian fields are in decline, following the path of such fields as the North Sea. Russia has promising fields in eastern Siberia, but developing those is expensive. The fields are hundreds of miles from anywhere, making it costly to get workers and equipment to the fields and then support them in one of the world’s more hostile climates. And then there’s the additional cost of getting the oil and natural gas from remote wellheads to market.

How expensive is expensive? Leonid Fedun, the vice president of Lukoil, Russia’s largest independent oil company, recently estimated that Russia needs to invest $1 trillion over the next 20 years to keep production in the range of 8.5 million to 9 million barrels a day.

Recently, a large crude find was discovered off the coast of Brazil. But it’s in the deepwater, which means it will take only the most advanced technology and the best of the best exploration companies to get the crude out. And none of that comes cheap:

Getting oil out of Carioca will require oil companies to go beneath 6,500 feet of water, then drill through 9,800 feet of rock and sand, and then through 6,500 feet of salt to get at the oil. That’s possible with cutting-edge technology, but it’s mighty expensive and time-consuming.

Estimates of fully developing the Tupi field, which involves similarly challenging geology, run to about $50 billion. Count on a decade before these fields reach full production.

Billions and trillions of dollars.

And the US Congress wants to tax the very companies that are going to be tasked with finding these new supplies? What’s in it for them then?

There is no easy fix to the energy crisis- though Congress will try and find one. That’s when we should all be REALLY afraid.

Crude continues to hit record highs every day. When will it stop going up?

No one knows- but eventually it will.

But crude isn’t the only energy commodity that is rising. Natural gas is at three year highs and is moving higher. Despite what most people think, natural gas use has two “peak” periods during the year.

Obviously, the first is the winter as people use natural gas to heat their homes. The second is the summer, when people also use natural gas to run their air conditioners.

Normally, in the spring and the fall, inventories of natural gas build. But this spring that didn’t happen. The winter was longer than expected and many people were running their heat a lot longer.

Inventories actually plunged during the spring.

We’re going into the summer air conditioning season without much supply.

Low supply + high demand = HIGH PRICES

Is it too late to invest in natural gas stocks?

The exploration and production companies have seen huge upticks in the recent month. Many are trading at 52 week highs. Here are a few:

Apache (APA)
Devon Energy (DVN)
Encore Acquisition (EAC)
Stone Energy (SGY)
Anadarko Petroleum (APC)

Many of the exploration and production companies are trading at 2008 P/Es of under 15, which would make them pretty cheap- especially with growing earnings.

None of the explorers have reported earnings yet. But with natural gas prices surging over last year, their numbers should be much better than 2007. Their earnings are also backward looking. In the current quarter, natural gas (not to mention crude prices) have soared even higher.

It’s not too late to own the exploration companies. But the prices won’t soar forever. At some point crude WILL pull back. As will natural gas.

For now, the natural gas bull appears to be picking up steam.