The oil and natural gas services sector is now in the energy upcycle. Shares of these companies are historically closely tied to production levels, doing best when capital spending is ramping up to boost output. I like Baker Hughes Co. (BKR) and SLB Ltd. (SLB), says Elliott Gue, editor of Energy and Income Advisor.
Gains usually occur toward the end of a multi-year oil and natural gas price upcycle. And as a result, services companies are usually the last energy stocks to really have their run, before the cycle inevitably turns down again.
BKR, SLB (YTD % Change)
Data by YCharts
But this time around, services companies like BKR and SLB are also positioned for big gains from a series of “shifts” in global markets, which have resulted from Operation Epic Fury fallout:
- A new imperative for importers to diversify sources of supply of oil and LNG, rather than rely solely on output from what have historically been the most productive regions, such as the Persian Gulf.
- Producers’ growing desire to use advanced technology to slow the decline rate of their existing fields as the least expensive way to maintain and potentially increase output.
- Growing interest of producers to develop energy reserves outside the Middle East, especially in Africa and South America, that have in the past been a footnote.
Baker and SLB were both recently up more than 47% year-to-date. But we believe the best is very much yet to come, as beneficiaries of post-Operation Epic Fury fallout and as the long-term price cycle continues to unfold.
Recommended Action: Buy BKR and SLB.
