Quick Logic for Buying Engineering & Construction, Energy Services ETFs

In the past few weeks I have seen many rational arguments supporting the case for higher oil prices, and thus, my reasoning for buying companies with exposure associated with exploration, extraction and construction of energy related services. By 2010, I would expect substantially higher oil prices making a strong case for buying Engineering & Construction as well as Energy Infrastructure companies now.

Rather than pick individual companies, I believe select ETFs will take out the guesswork and provide the exposure I am looking for.

Here is some of my rationale for my expectations:

• Oil fields are experiencing decline rates in conjunction with decreasing capital and exploratory spending
• Lower oil prices makes many projects once viable at $80+ oil, no longer profitable, thus reducing potential sources
• Oil supply will likely be reduced as available credit to build new projects to increase capacity becomes harder to find
• In an effort to firm up prices and lower current inventories, OPEC will continue to cut supplies
• Analysts have claimed OPEC countries are potentially producing less than quotas
• Many non-OPEC countries shunned more professional and efficient private partners when oil prices were much higher. The non-OPEC countries lack efficiency with much lower oil prices and thus, lower margins seems like a downward spiral to their production
• Russia has been responsible for a large portion of non-OPEC production. Knowing Russia's strong arm tactics and experiences with natural gas, I would think they favor market disruptions
• While a strengthening dollar could put downward pressure on oil prices, I personally don't see that as a likely scenario
• Many of the E&C and oil service companies still have very large backlogs
• The U.S. has the largest demand for oil. Given we were first into a recession, and likely first out, domestic demand in the U.S. could pick up sooner than later and drive prices higher.

The ETFs I find most fitting to these points are the following:

PXJ- PowerShares Dynamic Oil & Gas Services Portfolio

Factsheet: http://www.invescopowershares.com/pdf/P-PXJ-PC-1.pdf

PKB- PowerShares Dynamic Building & Construction Portfolio

Factsheet: http://www.invescopowershares.com/pdf/P-PKB-PC-1.pdf

or

FLM- First Trust ISE Global Engineering and Construction Index Fund

Factsheet: http://www.ftportfolios.com/common/etf/productinfo/FLM/FLM-factsheet.pdf

Disclosure: Author has positions in PXJ and PKB

Comments

[donzelion:]

Oil services will remain important - and investing through an ETF makes more sense than buying any companies. But I'd steer clear for now.

Outside their home countries (where dishonoring orders would carry immense consequences), the "massive, multi-year backlog" story is a fabrication: the companies know it, the governments they're contracting with in OPEC know it, and both are counting on shareholder ignorance to make it possible to get away with passing off "option contracts" as "future revenue."

Believe in a backlog when you've read through the contracts creating that backlog (fat chance of that...). Until then, all claims about backlogs in this industry are no more reliable than any other baseless claim about long-term earnings growth.

Feb 19 05:24 AM

[Gravity404:]

Excellent points, however, I think there is one more to add. As an optimistic contrarian investor, there are several factors here at home to consider.

We panic with $140 oil and have a myopic view on alternative energy, but when it sinks back under $40 that focus is low priority again. This last cycle, I think we still feel the sting, and realize $140 is just down the road - accepted as the new reality.

If government plans come to fruition, we are looking at a major increase in national exploration and production, drilling onshore/offshore, the other 99 percent of the North Slope, major increase in storage capacity (double the size of NSR), deep water, oil sands, etc. This approach solves two major issues – cutting some dependence on foreign oil and creating massive amounts of jobs (Permanent Jobs.)

It's not a matter of if, but when...The naysayers predict that we've explored and tapped all the oil we have domestically, but don’t tell that to the new reserves in the Dakotas and the rest of the untapped 85% near shore.

Looking at balance sheets and other fundamentals there are individual stocks that look good rather than playing ETFs.

Mid to long term investments - JEC, KBR, FLR, FWLT, NOV will all benefit as oil prices increase, but why not make money in the mean time. They build bridges, hospitals, school, roads, etc. They have excellent balance sheets, are well managed companies, tons of cash and very low PEs and expectations.

Just some additional thoughs on this area.

Feb 19 10:36 AM