John Reeves of the Motley Fool looks into stocks that may have upward growth thanks to the development of "digital oil fields."
In a recent article on trends in oil and gas technology, Mac Elatab looks at technology that will make "oil and gas easier, safer, cleaner and cheaper to extract." Ultimately, he feels that this development "presents a huge business opportunity … and quality of life could improve for everybody." Digital oil fields, which Elatab defines as "a web-based visualization platform from which companies can manage, measure and track all of the data coming from all over the oilfield" is a key piece of this initiative. Having spend 30 years in the semiconductor industry watching electronics become smaller, faster, cheaper and neater thanks to miniaturization, which demands the same thing for chip design, I am aware how large these support businesses can be so this piqued my interest.
John picked out five companies that can benefit from this development and I have thrown one in myself. John's selection:
- EMC provides its services to more than 95% of the oil and gas companies on the Forbes Global 2000.
- IBM recently announced that Watson, its famous artificial-intelligence computer, might be able to help energy companies discover best practices relating to "drilling analogs" and "extraction procedures from certain types of reservoirs."
- Schlumberger (SLB) is well-known for its commitment to technology development, so it isn't a surprise to see that it has a very significant digital oil field practice. I know somebody working in the area for the company in this space and there is a lot of activity
- Baker Hughes (BHI) is also very active in this space
- Microsoft (MSFT) also has some dedicated applications for oil exploration
That is a good set and to that I will add Cisco (CSCO) which is involved in a number of initiatives including smart buildings -- applications that demand huge amount of information to be stored and processed.
I hope that using a digital platform will bring the same sort of benefits in oil as it has in electronics. A side effect of this will be a lot of business for those providing the services around the digital platform and these could be stocks to watch.
We will compare this selection with our dividend bearing ETF portfolio, which gives access to emerging markets but not specifically to emerging super-brands or hot individual stocks.
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | (ICF) iShares Cohen & Steers Realty Majors |
| CASH | CASH |
| FIXED INCOME | (TIP) iShares Barclays TIPS Bond |
| Emerging Market | (VWO) Vanguard Emerging Markets Stock ETF |
| US EQUITY | (DVY) iShares Dow Jones Select Dividend Index |
| US EQUITY | (VIG) Vanguard Dividend Appreciation ETF |
| INTERNATIONAL EQUITY | (IDV) iShares Dow Jones Intl Select Div Idx |
| High Yield Bond | (HYG) iShares iBoxx $ High Yield Corporate Bd |
| INTERNATIONAL BONDS | (EMB) iShares JPMorgan USD Emerg Markets Bond |
- 6 Stocks for Digital Oil Fields -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
| Portfolio/Fund Name | YTD Return | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | -1% | -2% | -19% | 9% | 70% | 7% | 51% |
| 6 Stocks for Digital Oil Fields | 10% | -3% | -10% | 20% | 81% | 3% | 9% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 3% | -1% | -5% | 14% | 99% | 2% | 7% |
This is a long-term idea but not something on which one would want to bet the farm. Those involved in the oil industry are going to be large organizations and are going to stand the test of time. Having said that, they will all suffer a degree of volatility as the cost and demand for oil is never constant. On the other hand, there is no end to demand until oil runs out. From my reading of the numbers, they perform decently compared to the benchmark portfolio.
Three-Month Chart
One-Year Chart
Three-Year Chart
Five-Year Chart
The selection of equities gives you some diversification because IBM, Cisco, Microsoft all have other major focus areas, which balance out when oil is up or down. However, this is going to be an interesting area of development as creating a digital platform could have significant benefits in extending the ability to extract oil and reducing the cost of that extraction.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
