It requires a leap of faith to buy an energy stock when oil prices are falling. But Chevron (CVX) se...
2 Less Volatile Oil Plays
09/21/2012 4:53 pm EST
Demand should remain high for these two companies' offerings whether or not oil prices rise or fall on a given day, says Elliott Gue.
You may have considered oil as an energy investment, but where are other growth opportunities here in that industry? My guest today is Elliott Gue to talk about that. So Elliott, people have their ideas of whether or not oil’s going up or down. What are the other opportunities in energy right now?
One of my favorite sectors in global energy markets is the oil services industry. This would include a lot of companies that are involved in various activities related to drilling wells or producing from wells, or going in and doing maintenance on wells.
The largest in the world is a company called Schlumberger (SLB). It’s a company I do like a lot, and one of the things that we’re seeing right now is in international markets that business is really tightening up. With oil—the Brent crude oil price is well up over $100 a barrel. US WTI or West Texas Intermediate prices are much lower, but internationally oil prices are very high.
That means that companies are allocating a lot more money to expending on exploration and development of fields they’ve already found. So, they’re spending a lot of this money, and a lot of this money is flowing to the services firms.
In Schlumberger’s case, they’ll manage projects, big international oil and gas projects. What they’re seeing is that there’s not enough service capacity to meet all of the demand that’s out there. So, as a result, they’re able to boost their prices.
Another thing they’ve been doing; one example is the seismic services business. Now, this is using sound waves and pressure waves to map sub-sea—so under the sea floor rock formations that might contain oil or gas. Typically, it’s done in an exploration phase; companies actually going out and looking for new oil or gas fields to target. They have new technologies that allow very sharp, three-dimensional resolution of sub-sea rock formations. It really helps firms narrow down where they’re going to drill.
Now, when you consider that a deep-water drilling rig can cost over $600,000 a day just to lease just the rig, and it could take hundreds of days to actually drill a series of wells, companies really want to make sure they’re drilling the best possible targets. So, Schlumberger has been able to—there are not enough of these deep-water seismic services boats out there to actually meet all the demand—so they’ve been raising their prices a lot on that and we’re just seeing the turn right now.
Typically, these oil-services cycles, the positive pricing environment, the positive margin environment will last two to three years. So, I think we’re in the very early stages of a nice jump for companies like Schlumberger.
Alright, any other company besides Schlumberger that you like right now?
Another company I’d look at is on the deep water contract-drilling side, and these companies own the rigs that are used to drill oil and gas. They don’t actually produce oil and gas themselves, but they own the rigs. They lease them to companies like Exxon, like Chevron, like Total that turn around and use those rigs to drill for oil and gas.
SeaDrill (SDRL) is one of my favorites. They own a fleet of these deep water drilling rigs used all over the world. We’re seeing a number of new major oil and gas deep water discoveries in various parts of the world; offshore Brazil, Gulf of Mexico, offshore West Africa—places like Angola and Nigeria—and the new one is really offshore East Africa—Mozambique, Tanzania, countries like that—that nobody really thought were very prospective, but they’re finding some big oil and gas finds off the coast.
There are not enough rigs to go around, so what we’re seeing is there’s only a couple of rigs available for drilling in 2012, and maybe a handful; a half dozen available in 2013. All of the other rigs in the world have been locked up under long-term contracts.
So, companies are aggressively bidding on the few remaining rigs out there, and therefore the rates they’re willing to pay have been ramping up. So, we’ve seen day rates go from $450,000 a day a couple years ago to recently we’re seeing more like $650,000 a day. Companies are locking in these rates for periods of three and five years, and in SeaDrill’s case, that’s exactly what they’re doing.
The best part of it is they’re using those long-term contracts—the free cash flow from that—to pay out a nice 8% dividend yield, so it’s a dividend play as well.
Elliott, thanks for your time.
Thanks for having me.
Related Articles on ENERGY
If these whipsawing oil markets are making you dizzy, you're far from alone. But this isn't the time...
I like to invest alongside CEOs that have a hot hand and, of late, one of them is Carl Icahn, as he ...
Lower prices, reduced environmental impact and safety continue to fuel Americans’ ongoing conv...