Why I'm Bullish on the Iraqi Oil Market

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 |  Includes: TTES, WFT
by: Wealth Daily

By Steve Christ

With the dreadful war in Afghanistan now grabbing all of the headlines, Iraq has somehow slipped well below fold.

In fact, quelled by the controversial troop surge, the picture in Iraq actually seems to be improving nearly everyday.

And while normalcy isn't exactly a word that comes to mind when describing this troubled country, progress comes easy when you start from the ruble of ground zero.

That has been the story — at least in the Iraqi oil industry, where things had gotten so bad under Saddam Hussein that outpacing the old production figures was a pretty low bar to clear.

What's more, even though Iraq can claim to have the world's third largest proven reserves of conventional crude, current production levels are still well below the country's 2003 pre-war output.

The result is that, given the range of possibilities, Iraq's contribution to the world oil scene is still pretty pathetic. After all, dictators, wars, and civil unrest aren't exactly production boosters when it comes to pumping oil...

That's because without the involvement of big international companies such as Shell (NYSE: RDS.A), BP (NYSE: BP), and Exxon Mobil (NYSE: XOM), maximizing production in these fields is nothing but a fairy tale.

As guys like Venezuelan dictator Hugo Chavez have since found out, oil can't be simply wished out of the ground.

Oil in Iraq: The Next Big Opportunity

Fortunately for Iraq, though, the situation is about to change pretty dramatically over the next six or seven years. Iraq has finalized 10 new contracts, recently awarded to foreign oil companies as the nation looks to revamp an oil sector battered by years of sanctions, neglect, and violence.

And with Iraq now poised to begin the first major overhaul of its energy sector in decades, investors stand to benefit in a big way from the multi-billion dollar effort to redevelop the country's oil economy.

For the international firms that won the development rights in these fields, the 20-year contracts are their first chance to pump Iraqi oil since Saddam Hussein expelled foreign firms and nationalized the sector during the 70s.

It's a project described by some analysts as the greatest opportunity in the oil patch today, along with the oil boom in the Bakken.

Here's why: If all goes according to plan, Iraq will eventually produce 12 million barrels per day — 10 million more than it pulls out of the ground today.

At those levels, Iraq would actually rival the production of Saudi Arabia — the biggest player on the books — with an overall output capacity in excess of 12 million barrels per day.

In total, Iraq has an estimated 115 billion barrels of proven crude-oil reserves, valued at roughly $9.5 trillion.

One of the biggest fields is located in Rumaila, where BP PLC was recently awarded $500 million in contracts in what will be the first step by foreign oil companies to revive the country's lagging energy industry.

Needless to say, that is going to be an incredibly tall order — even for the big players. As a result, those goals are going to take some serious money in terms of capital investments.

And once these big companies begin to hit the ground, the amount of spending will be "staggering," according to Richard Ruggiero, an area manager for the Americas for Gaffney, Cline & Associates in Houston.

This sentiment was echoed recently by James D. Crandell, an analyst at Barclays Capital in New York, who recently told Bloomberg that "Iraq is probably the biggest opportunity, along with possibly Brazil, confronting the oil-services industry... It's a country that has a significantly higher capability of exporting crude oil, but it needs a lot of work done on its fields."

2 Ways to Invest in the Surge

That's where T-3 Energy Services Inc. (NASDAQ: TTES) enters the picture.

To meet those goals, the Iraq oilfields will need plenty of the equipment provided by this Houston-based firm, which includes wellheads, blowout preventers, and pipeline valves. Onshore and offshore, T-3's products are used by leading exploration and production companies worldwide.

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The company also provides a broad range of oilfield products and services in the drilling and completion of new oil and gas wells, as well the work-over of existing wells and the production and transportation of oil and gas.

A big international player, TTES derives 50% of its revenue from products destined for international delivery.

Simply put, these guys are everywhere that matters. T-3 reported first quarter 2010 net income of $2.0 million, or $0.15 per share and anticipates a meaningful recovery in the second half of 2010.

Another company for investors to consider is Weatherford International (NYSE: WFT), a company with a substantial Middle East presence. (Read: Iraq).

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One of the largest international oil and natural gas service companies, Weatherford has secured two contracts for drilling in southern Iraq and will also start drilling in the Kurdistan region on Friday, according to Rex Cramer, area manager for Middle East operations at Weatherford.

This is one of the reasons why Weatherford recently maintained its 2010 guidance for 30% growth in international markets — three times the industry average — giving Weatherford investors the chance to buy this growth at a discount to its peers.

Compared to Schlumberger (NYSE: SLB) with a PEG ratio of 1.56, Weatherford is cheap by comparison sporting a PEG ratio of just 0.80.