Look To This Energy Industry For Second Half 2012 Profits…
In case you haven’t heard, US oil production is booming!
That’s right, after 30 years of declines, US crude production is back on the upswing. In fact, production’s jumped from 1.86 billion barrels in 2006 to just over 2 billion barrels in 2011…
Where’s this new production coming from?
Unconventional shale plays like the Eagle Ford of south Texas and the Bakken of North Dakota are the key to America’s oil industry resurgence. As oil companies further unlock the secrets to these challenging geologic formations, US crude reserves are growing right along with production.
As a matter of fact, US proved crude reserves jumped by nearly 3 billion barrels in 2010.
That’s the largest increase ever recorded since the US Energy Information Administration (EIA) began publishing reserve estimates in 1977! Total US proved crude and lease condensate reserves now sit at 25.2 billion barrels.
With all this new oil industry activity, it makes sense to think that oil service companies would be able to write their own ticket- and therefore be a great investment.
After all, without the expertise of companies like Baker Hughes (BHI) and Halliburton (HAL), this modern day energy gold rush wouldn’t be possible.
But the devil’s in the details when it comes to investing in oil services…
As a matter of fact, the past 6-8 months has been surprisingly rough for the US oil services industry. And that’s precisely why oil services stocks were some of the market’s worst performers in the first half of the year.
Take a look…
As you can see, BHI and HAL underperformed the S&P 500 (green line) by a wide margin in early 2012.
What’s going on?
Even though crude production is surging, the dramatic slowdown in US dry natural gas drilling is taking a heavy toll on these companies.
As we’ve talked about in previous articles, extremely low natural gas prices have drilling for the abundant commodity all but coming to a halt. And that’s not good for oil services companies, which rely heavily on these revenue streams.
But where there’s crisis, there’s opportunity…
This year’s downtrend in BHI and HAL has clearly been a rough ride for investors. But if you’re new to these stocks, the recent weakness is presenting a great opportunity to grab these shares on the cheap.
As a matter of fact, BHI and HAL currently trade for a mere 11x and 9x trailing earnings respectively. That’s cheap compared to the oil services industry average of 29x earnings.
And here’s the best part…
BHI and HAL reported second quarter 2012 earnings recently. And even though the natural gas drilling slowdown is woefully apparent in their earnings, these companies still managed to beat Wall Street’s Q2 estimates.
As a result, both stocks have surged over the past few weeks…
As you can see, BHI and HAL are clearly outperforming the S&P 500 in recent trading. And as long as oil holds above $80 a barrel in coming months (which I believe it will), this outperformance will likely continue into year-end.
Bottom line…
Industry headwinds had oil services industry stocks sliding lower earlier in the year. But better than expected second quarter earnings from industry leaders BHI and HAL may mean oil service stocks are ready for a big rebound.
If you’re looking for exposure to the energy sector, oil service companies like BHI and HAL are a solid choice!
***Editor’s Note*** Subscribers to The Energy Investor got the lowdown on an even better way to invest in US oil services industry yesterday. It’s an up and coming energy company with a specialized business model and incredibly strong balance sheet. If you’d like to discover why this sub $20 energy stock has huge profit potential for investors, click here.
Until Next Time,
Justin Bennett
Category: Commodities
