The price of oil has been on the rise for a while now, and many energy companies are finding ways to take advantage of this situation. Several companies have shifted their focus from natural gas to oil, including Concho Resources (CXO). However, I do not believe that this will be enough to maintain the stock's competitiveness in the face of thefts, a bear market and unstable operations. The entire oil industry is taking a hit, but Ensco (ESV) has figured out a way to stay on top, which makes it one of the best oil stocks around, in my opinion.
I expect Concho's stock value to decline, as the trend shows hints of reaching its peak. Additionally, the bearish attitude of investors at the time of writing is a solid indication to me that the stock has just peaked and will likely drop again. However, typically at this point, we will see a small rise before the full drop. According to this development, shareholders could consider selling to make a short-term profit.
Since other oil stocks like Ensco are following an almost identical pattern, I would posit that market conditions and other outside forces are to blame for the upcoming loss of value that I foresee, rather than internal structural issues. These outside forces include the rash of oil field thefts that have plagued some parts of the United States this year. Police are cracking down on this type of activity by heightening security in ways that involve community members as well as conventional surveillance tactics, but these thefts are likely to cause losses among the targeted companies.
Accidental and negligent oil spills are never good for a stock either, and Transocean (RIG) and Chevron (CVX) are caught up in legal discussions over two recent leaks off the coast of Rio de Janeiro. For now, federal courts have decided to allow these two companies to continue their joint operations, in spite of a prosecutor's request to halt activities until the lawsuit is resolved. Meanwhile, Chevron and Transocean are engaged in another legal fight with Brazil's largest oil union, which is trying to force the company to take responsibility for its pollution, or leave the country. In my opinion, the outcome of these battles and foreseeable future ones will affect the stock of both these companies, so it would be wise for them to clean up their operations. Although environmental responsibility can cost money, a long-term vision that enables them to hang on to their Brazilian license would suggest that it is worth the investment, in my view.
Forbes reports that Transocean is taking advantage of shallow-water drilling in the Gulf of Mexico, which could counteract losses experienced off the coast of Brazil. In this way, I do not expect the stock to devalue significantly in the coming weeks and even months, but it will have to do something to deal with its nearly $6 billion of negative income. For investors, I would argue that this stock is performing poorly, and maybe even struggling, which suggests that its viability might be questionable.
This question could explain why the company is trying so hard to keep the United States Chemical Safety Board (CSB) from investigating internal records and other information related to the Deepwater Horizon oil spill in 2010. I expect the legality of the matter to allow the investigation to go through, which I expect will impact Transocean's stock value with another undesirable shock.
In the midst of all of this imminent and current potential for disaster, Ensco seems to be floating along swimmingly, if you will excuse a bad pun. This company has just bought a new deepwater drillship on a contract that has an option to request two more of the same design. As rates for drilling equipment skyrocket, Ensco looks to be well positioned to rake in a nice profit from this new drillship, which is designed to operate in 12,000-foot-deep water with a total vertical drilling depth of 40,000 feet. As evidence of this profitability, BP (BP) has just signed a five-year contract with Ensco for the use of the ENSCO DS-6, which can drill in water up to 10,000 feet deep. With money flowing in from this single agreement, I see no reason why Ensco should have to worry about maintaining its competitive edge in the near future, especially with its direct competitors flailing about as they appear to be.
While Chevron and Transocean are busy spending money on legal battles, Ensco seems to me to know what it is doing. For this reason, I would gravitate toward this stock in terms of investment ideas. Even Concho Resources does not appear to be particularly exciting, with the upcoming decrease in value that I expect to see very soon. This company has not done anything in the past months to garner real interest from investors, and I see nothing happening these days to change that impression.
As the price of oil rises, these companies should be poised to increase revenue, but it seems to me like they have too much else to do. Unless Chevron and Transocean can stop creating problems for themselves by improving their practices, I think that they will have a hard road ahead. Conversely, Concho Resources needs to bring in some new blood, in my opinion, so that the company can start working on finding and developing growth opportunities.
At the end of the day, only the people at Ensco appear to be on track. This company is behaving like it knows where it is going and how to manage its resources to balance output and income. I do expect to see a mild fall in share price in the next week or so, but once investors realize that this is one of few oil stocks that remain strong, I will not be surprised to see the value shoot straight back up again. This means that it might be a good idea to take advantage of the decline to buy some shares in this company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.