Oil Market Being Battered by a Perfect Storm

12/07/2015 10:13 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

Technology improvements have destabilized the supply side of the oil market, while demand is being affected by declining global growth, so Michael Berger, of Technical420.com, explains why he is still bullish on the US energy service market and several midstream suppliers.

The Organization of Petroleum Exporting Countries (OPEC) failed to reach an agreement at their meeting in Vienna on Friday and this should contribute to further volatility in oil markets, with prices remaining low for longer than many expected.

The collapse in oil prices has impacted export revenue of all OPEC producers and some members have been able to manage their economies better than others. The weak price environment has destabilized Venezuela and increased the potential for political and social turmoil. Countries like Saudi Arabia and the United Arab Emirates have sufficient financial reserves, accumulated wealth, and policy flexibility to manage the transition in which many of the non-traditional suppliers will be knocked out by lower prices.

The oil market is being battered by a perfect storm. Technology improvements have destabilized the supply side, while demand is being affected by declining global growth.

Bullish on US Energy Service Market and Midstream Suppliers

One of the stocks we have become increasingly favorable on is Baker Hughes Incorporated (BHI). Our favorable outlook on BHI stems from our bullish long-term outlook for the North America energy services market and a favorable acquisition price.

Last November, Halliburton Company (HAL) agreed to acquire BHI for $34.6 billion. This equates to $78.62 a share in a cash and stock merger. HAL is paying an over 40% premium to BHI shareholders and offering a lot of stock to get the deal done. Each BHI shareholder is set to receive 1.12 shares of HAL and $19 in cash per share if the deal closes. Should the deal not close, HAL must pay BHI $3.5 billion or $8 per share, giving BHI shareholders some additional protection.

We also see value in Tesoro Logistics LP (TLLP) and think they are one of the highest quality growth stories in the master limited partnership (MLP) industry. TLLP has a supportive parent company, Tesoro Corporation (TSO), which provides excellent financial support. TLLP has visible growth due to recent accretive acquisitions and dropdowns from TSO and offers investors a 5.9% dividend.

During the near term, we see upside in TLLP due to the potential for accretive growth from an expected dropdown acquisition in the fourth quarter. Also, oil prices manage to rebound off of recent lows, we see even greater upside in TLLP to current levels.

WTI Is Trading Below $40

As of this morning, West Texas Intermediate (WTI) is down more than 1% and WTI is trading at $39.44 per barrel. Brent Crude is trading near the $43 level and we continue to monitor the spread due to our bullish long-term outlook for the North America energy services market.

Michael Berger, Founder and President, Technical420.com

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