Thursday, July 28, 2011
There's plenty of upside left in the oil services sector.
As my colleague Matt Badiali explained earlier this week, oil services companies are blowing out earnings expectations. He focused on the incredible boom in shale gas drilling.
That's a major driver here. But there's more to the story than that. And I expect these two factors to propel the oil services uptrend for years...
I've been talking about the massive tailwinds for stocks like Schlumberger, Halliburton, Baker Hughes, and Weatherford since January. These are the guys that make the "picks and shovels" for oil majors like ExxonMobil, BP, and Chevron.
Strong earnings are leading to higher stock prices. In fact, these four oil services giants have outperformed the S&P 500 index (on average) by more than 20% in seven months. Expect more of the same...
First, according to OPEC, cash-rich oil companies are projected to spend almost $500 billion in "cap-ex" in 2011. That's an increase of 11% from last year.
Cap-ex is the amount of cash oil companies will pay to increase reserves. In other words, oil majors will be spending this money on new oil exploration projects. They will also use it to upgrade existing wells – which bodes well for the picks and shovels plays.
I expect huge cap-ex expenditures to continue for the foreseeable future. Major oil companies are digging deeper than ever to find oil... and finding it in a lot harder-to-get-to places.
Second, on the international front, earnings and margins are soaring. As you can see from the table below, the four major oil services companies I mentioned earlier receive a huge portion of revenue from outside the U.S.
Deepwater drilling activity is surging. Unlike in the U.S., governments worldwide are not preventing oil companies from drilling 10,000 feet below the ocean floor.
Also, shale activity is ramping up in places like Poland, Argentina, China, and Australia. Technology has become so advanced that these large services players can drill wells in half the time, resulting in huge cost savings. That explains the huge increase in margins.
I suggest buying these four companies at current levels.
The massive boom for picks and shovels is in its early stages of growth. The major oil companies have boatloads of cash, which will be used to find oil. And the world is racing to catch up to U.S. levels of energy consumption.
These catalysts will fuel the four oil services stocks over the short and long term.
"If you want a booming commodity investment, start here," Matt writes. This "pure play" on the frac boom is one of his favorite oil services stocks for the long term.
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