Invest in energy and oil stocks

Eric Roseman - Thu 26 Oct, 2006

...Now it's time to buy the most profitable segment of the energy bull market since 2002 the oil services and equipment stocks...

 
 
- Signs of a bottom in the energy complex are finally arriving. Bruised and battered from a barrage of ruthless profit-taking in September, the entire complex has been mauled. Now it's time to buy the most profitable segment of the energy bull market since 2002 – the oil services and equipment stocks.

- After a major decline from over $77 a barrel in August, crude oil prices recently hit a 12-month low below $57 a barrel. But heating oil, gasoline and even hard-hit natural gas seem to be stabilizing.

- The way I see it, now's the time to step back into this bull market at fire-sale prices, especially for the companies that drill for Black Gold.

Invest in energy and oil stocks: The oil services sector

- The bull market in energy has not been confined to just oil stocks. In fact, one of the most profitable sectors in the stock market remains in the incredibly profitable oil services sector. The oil services sector encompasses a wide array of oil-related duties, including installing and servicing rigs (old and new), labour, replacement parts, seismic testing, etc. And right now, these services are in high demand.

- The good news for long-term investors is that following a severe correction since late August, the oil services group now trades 22% off its all-time high. Powered by several hugely profitable companies, this industry is about to head into overdrive as we surpass US$100 oil over the next 12-24 months.

- Oil drilling and services include several sub-sectors as part of this highly specialized industry. The drilling segment includes those companies that physically drill and pump oil and gas out of the ground. Costs associated with oil drilling are enormous – so expensive that many service-providers in the Gulf of Mexico have fled to more lucrative projects in the Middle East recently.

- The drilling industry offers a highly evolved range of rigs, including land rigs, submersible rigs, jack-ups, and drill ships. The infrastructure of the entire industry requires highly labour-intensive professionals, peripheral parts and supplies that have literally bolted to the moon since 2003 because most raw materials have hit multi-decade highs.

- Everything from steel tubing to copper has risen significantly over the last three years, putting pressure on lease rates and costing oil exploration companies a fortune to find new and existing supplies, including available labour.

- Although some industries have been reluctant to pass on rising input costs to their customers, the oil services sector has boosted daily rates on many occasions this decade as oil prices surge and the hunt for new supply grows.

Invest in energy and oil stocks: Oil service company revenue

- This is where it gets interesting: For every barrel of crude oil that's recovered, 53% of that revenue goes to the oil services companies.

- If any major oil company is going to explore for oil, it needs the services sector to find that Black Gold or natural gas. So you can bet that many companies are struggling to find excess drilling capacity in an industry that is barely meeting new demand. In my book, that spells big profits for shareholders.

- Oil equipment fundamentals are phenomenal right now.
Earnings are roaring, stocks are technically in a powerful long-term uptrend and the geopolitical landscape continues to deteriorate, threatening current supplies. If violence erupts in the Persian Gulf, the oil equipment stocks will rally as existing supplies must be replaced by the large-cap producers.

- It's all about supply and demand for oil at this stage of the bull market. Any lost output due to a conflict or attacks on major installations imply leveraged revenue growth for a sector already boosted by record earnings.

- From our perspective, the time to buy great companies in the midst of a bull market is following a correction, not when prices are trading at all-time highs. That's exactly why we're buying the oil services stocks now – when prices are almost 25% lower compared to highs achieved earlier in May.

- As investors, we're always conditioned to buy a rising trend. That's because it's easier, psychologically, to purchase an investment when prices are rising. But truthfully, that's not the path to big profits.

- I've never made great money riding momentum or buying a major trend at, or near, an all-time high. It takes guts to buy amid a decline for a sector or stock, but in reality it's how this service has made money for its members since 2001.

- Sometimes, we've taken hits bottom-fishing; but overall, buying low or following a steep correction is how you plant long-term seeds for wealth accumulation.

- Right now, the oil services and equipment stocks are poised for a major recovery. With the index now almost 25% lower since last spring, we're finally buyers.

- I expect earnings to remain buoyant as demand booms for rigs and labour; oil exploration is an expensive business and I think the big money to be made over the next few years will continue to reside in the companies that extract oil.


Regards,

Eric Roseman
for The Daily Reckoning
   

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