Higher Oil Prices Boost Service Firms

03/17/2008 12:00 am EST

Focus: STOCKS

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer’s Investor’s World, thinks oil prices will stay high and he thinks one oil services firm will profit from it.

From an inflation and economic point of view, the best outcome is for oil prices to stabilize at a level low enough to favor economic growth. Stable oil would reduce the inflation rate.

I thought oil would go lower before now, back to at least $80. So far, that has not happened. However, Europe is slowing down. China is slowing down, and demand for gas and oil in the United States has declined. There have been new discoveries: BP will start benefiting from new production in the Gulf of Mexico in a few months. And thanks to new offshore discoveries over the next few years, Brazil will shift from being a net energy importer to being a major oil exporter.

In Orlando, at the World Money Show last month, I was the moderator of an ADR panel that included Brazil’s Petrobras. I asked about the cost to produce oil in Brazil’s new discoveries. Even though the oil lies deep under the sea floor and requires new expensive technologies, the answer is that $35 or more a barrel will make this new oil field profitable.

But as oil prices have risen and oil company profits expanded, all involved want a piece of the profits pie. So costs have been rising, along with the oil price. As a result, I doubt that oil will fall back to $40 a barrel. More likely, oil prices will stay high enough to keep energy companies and oil services companies growing.

Halliburton (NYSE: HAL) is [our favorite] oil services company. Halliburton trades at a discount to its peers because of a lingering bias against its contracts in Iraq. Some still associate Halliburton with Iraq. In fact, the company was split in two in the spring of 2007. Halliburton is now a pure oil services company. And management has placed emphasis on the Middle East by moving the headquarters to Dubai. That is already proving successful.

That will help to bring Halliburton’s valuation up in line with that of its peers. Estimates for this year range from $2.88 to $3.21 a share. Given Halliburton’s strong fourth quarter, earnings are likely to be at the upper end of this range. That will support a stock price of $50 within 12 months. (It closed above $38 Friday—Editor.)

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