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Four Stocks for the Global Shale Boom

By Frank Curzio, editor, Phase 1 Investor
Friday, November 1, 2013

Oil-services stocks are booming.
 
In January, I highlighted the massive spending spree taking place in the oil industry.
 
I told readers oil exploration and production companies were planning to spend a record $644 billion this year to find oil... And the biggest beneficiaries of this spending would be oil-services companies.
 
These are the "nuts and bolts" plays of the industry. They provide drilling equipment and service crews to oil giants like ExxonMobil, Royal Dutch Shell, and ConocoPhillips.
 
Since my prediction in January, oil-services stocks have pushed sharply higher. But it's not too late to make a lot of money on this trend...
 
Take a look at the chart below... The trend is up in energy stocks in general. But this big spending trend has helped push oil-services stocks up twice as much as oil producers.
 
oil services vs oil producers
 
I told you to consider buying oil-services stocks with international exposurelike Schlumberger, Halliburton, Baker Hughes, and Weatherford. Investors who followed my advice are sitting on average gains of 25%.
 
But despite the recent run higher, it's not too late to jump into these names. They're still likely to go much higher in the years ahead.
 
You see, there's a reason spending is surging in the energy industry: Most oil companies are having a tough time finding oil.
 
That may seem surprising given the huge surge in oil production in America. But while U.S. production is at record highs, it's still only producing 7.5 million barrels of oil per day. Meanwhile, the world consumes about 90 million barrels of oil a day. So the U.S. only accounts for roughly 8%. And the rest of the world is struggling to replace its oil reserves.
 
Most companies outside the U.S. are seeing their reserve replacement ratios (RRR) go lower and lower each year.
 
The RRR is an important barometer used in the oil industry. It measures the amount of proven reserves added to a company's base relative to the amount of oil produced each year. A ratio above 100% means current production is growing. Below 100% means a company is having trouble replacing its reserves – and could eventually run out of oil.
 
As I mentioned back in January, the 10 largest oil companies (based on reserves) only replaced roughly 70% of their oil reserves annually over the past three years. These large producers are mostly state-run oil companies, like Saudi Aramco, Gazprom, and PetroChina.
 
But even giant producers like ExxonMobil, Royal Dutch Shell, and BP are having trouble finding oil. Exxon's oil production has declined for nine straight quarters (compared to the previous year). Royal Dutch Shell's oil production is down from last year. And BP's production has declined 2% year over year.
 
In short, these major oil companies have to spend more money to find oil. And according to investment firm Barclays, most of this spending is taking place in the international markets. This includes drilling off the coastlines of Brazil, Australia, and Asia. Plus, Europe is just beginning to tap its shale areas for oil.
 
Schlumberger, Halliburton, Baker Hughes, and Weatherford receive 60% of their revenue from overseas markets. And despite their recent run higher, these stocks are still cheap. They trade at an average of 13 times forward earnings. That's a discount to the average S&P 500 company, which trades at 15 times earnings.
 
With the largest oil companies in the world having trouble finding oil, spending will continue hitting new records going forward. This tailwind will result in huge earnings growth – and ultimately much higher stock prices for these four oil-services names.
 
Good investing,
 
Frank Curzio




Further Reading:

Catch up on Frank's recent research on the offshore-drilling boom right here:
 
A Radical New Approach to Energy Production
This "floating city" is capable of drilling for natural gas almost anywhere offshore.
 
A 50% Trade on the World's Most Important Energy Companies
"Before oil producers build platforms or hire drillers, they need to make sure the oil is there... They need to hire specialty businesses that can confirm there are actually hydrocarbons in the ground."
 
This Niche Energy Sector Is Set to Grow 40% in the Next Year
The spending spree on offshore drilling projects will benefit infrastructure companies that build offshore platforms.

In The Daily Crux
Market Notes
Huge "bad to less bad" rally in steel stocks... U.S. Steel rockets 45% in three months.
 
Clothing stores are struggling... Gap and Abercrombie & Fitch fall 20%-plus over the past three months.
 
Coffee prices plunge to a new four-year low.
 
Great tech businesses are still cheap... IBM, Microsoft, Cisco, and Oracle are up less than 10% in six months.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1756.54 -0.4% +24.4%
Oil (USO) 34.69 -0.5% +9.2%
Gold (GLD) 127.74 -1.4% -23.4%
Silver (SLV) 21.10 -3.6% -32.5%
U.S. Dollar 80.26 +0.7% +0.4%
Euro 1.36 -1.0% +5.0%
Volatility (^VIX) 13.75 +0.7% -26.1%
Gold Stocks (^HUI) 236.67 -3.6% -53.3%
10-Year Yield 2.54 +0.4% +50.3%

World ETFs
Symbol Price
Change
52-Wk
Japan (EWJ) 11.91 -0.5% +33.5%
Israel (ISL) 15.96 +0.9% +27.2%
USA (SPY) 175.79 -0.3% +27.1%
Taiwan (EWT) 14.52 +0.0% +17.5%
S. Korea (EWY) 63.90 -1.8% +11.6%
Singapore (EWS) 13.81 -0.4% +6.2%
Russia (TRF) 15.28 -0.1% +6.0%
China (FXI) 37.57 +0.1% +5.1%
Canada (EWC) 29.36 -0.1% +4.4%
India (IFN) 20.97 +0.7% +3.1%
S. Africa (EZA) 65.62 -1.2% +2.8%
Lat.America (ILF) 39.77 -1.4% -3.2%

Sector ETFs
Symbol Price
Change
52-Wk
Alt. Energy (PBW) 6.42 +0.0% +65.9%
Biotech (PBE) 35.17 -1.1% +57.9%
Media (PBS) 24.08 +0.5% +48.7%
Defense (PPA) 28.66 -0.3% +45.2%
Retail (PMR) 34.73 +0.6% +40.4%
Transportation (IYT) 124.64 -0.5% +40.0%
Consumer Svcs (IYC) 115.47 +0.3% +37.2%
Industrials (IYJ) 94.40 +0.1% +36.0%
Health Care (IYH) 110.93 -0.3% +34.8%
Semis (PSI) 17.82 +1.3% +33.3%
Financials (IYF) 75.95 -1.1% +30.6%
Big Tech (QQQQ) 82.74 -0.3% +29.2%
Water (PHO) 24.82 -0.2% +27.9%
Construction (PKB) 20.89 -0.6% +27.3%
Software (PSJ) 33.72 +0.2% +24.7%
Telecom (IYZ) 29.32 -0.4% +23.7%
Nanotech (PXN) 6.92 +0.4% +19.6%
Insurance (PIC) 19.01 +0.1% +18.3%
Basic Mat (IYM) 77.18 -0.2% +17.6%
Utilities (XLU) 38.78 -0.4% +9.3%
Real Estate (IYR) 66.17 -0.7% +7.5%

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