The Cheap Oil Syndrome: 3 Stocks to Benefit

The dominant question on the minds of many market participants at this time is whether or not the price of crude oil can sustain its current lofty level. Is the age of cheap oil really gone forever, or is it that the current high price is just the result of excessive investor speculation and is bound to come back down to earth? While arguments can be made for both sides of the issue, there is a preponderance of evidence to suggest that the upward trend in the price is secular in nature.

One only has to recall the trip to Saudi Arabia that the President of the United States (the world’s largest oil consumer) made at the beginning of the year. Neither the President, nor all his horses and all his men, could cajole the Saudi government and other Organization of Petroleum Exporting Countries [OPEC] members to increase oil output. In a speech given during that visit, he offered that “OPEC should understand that if they can put more supply on the market it will be helpful.” Mr. Bush went on to say to his good friend and host, “I will say to Abdullah that high energy prices can affect economic growth because it's painful for our consumers ... could cause the U.S. economy to slow down.”

The House of Saud, one of America’s closest allies in the region, balked. This was clearly an augury. Oil was flirting with the psychologically important $100.00 per barrel threshold at that point, which has since been breached, and is now heading further north.To the casual and not so casual observers alike, it was reasonable to wonder as to the reasoning behind Mr. Bush’s rather unconventional stand. The answer to this can be inferred from his subsequent comments that energy demand has “outstripped new supply,” and “that's why there are high prices.”

More evidence supporting the outlook for higher trending oil prices comes from Schlumberger (SLB), the world’s largest Oil Services Company. The company is uniquely positioned to provide unparalleled insight about the state of global oil production. This stems from the fact that its clients are located all over the planet and run the full spectrum of oil producers, including National Oil Companies (NOCs) and the major integrated oil companies. From the company’s point of view, new discoveries of hydrocarbon deposits are not being made to compensate for the rate at which existing reserves are being depleted. Schlumberger’s CEO, Andrew Gould, expressed that sentiment during a past conference call to investors that the current rate of depletion of non-OPEC reserves being forecasted by rating agencies is “somewhat optimistic.”

At present, the U.S. relies heavily on oil imports from both of its neighbors to the North and South. Mexico, which whom the country shares the southern border, is also its second largest oil exporter (Canada is the largest). It is also well documented that Mexico’s current rate of production is approximately 3.1 million barrels per day, which is actually down from the 3.3 million barrels per day it used to deliver about four years ago. More evidence to suggest that supply is falling and prices are likely to remain elevated.Perhaps, the most poignant signal of higher oil prices is the declining value of the dollar. The value of the currency has an inverse relationship with the price of oil and other commodities that are priced in dollars. Subsequently, a fall in the value of the dollar decreases the amount of the currency that OPEC members and other oil producers collect for oil.

As such, there is a compelling incentive to keep the price of oil high. High oil prices increases the size of the U.S trade deficit as the country is a net importer of oil. A growing trade deficit in turn puts downward pressure on the value of the dollar fueling a vicious continuous loop. While in the short-term, there is some evidence to suggest that the dollar could rebound this is not likely to be enduring. The long-term outlook for the value of the dollar recovering meaningfully at this point is rather remote.

At this juncture, it is clear that a paradigm shift in thinking away from an era of abundant oil supply to one of restricted supply needs to be embraced. Even the Pentagon has made the change with its recognition that in the long-run, the rising cost and shrinking supply of oil diminishes the U.S. military’s capability to respond to conflicts around the world. It stands to reason then that any thesis forecasting a future of cheap oil is in dire need of substantive review.

The market forces currently at work clearly suggest that the secular trend for oil prices is up. With that in mind, a number of companies stand to benefit from the current state of affairs. Among our favorites are:

Schlumberger (SLB): The increased spending by exploration production companies to find new reserves renders Schlumberger a winner.

Transocean (RIG): The company is benefiting from the strong demand for offshore drilling assets, especially for those operating in the deepwater segment. There is currently a dearth of supply of this type of equipment and as such, new contracts are being written at higher rates. This enables Transocean to take advantage of the rising price environment.

Halliburton (HAL): Halliburton management is executing very well and the company is well positioned in the Eastern Hemisphere where demand for its services is likely to be sustained for the foreseeable future. As such, the anticipated cash flow generation should provide the company with sufficient financial flexibility to pursue its share repurchase program and even possibly increase its dividend.

Written by Conley Turner, a Research Analyst for Wall Street Strategies, (www.wstreet.com) specializing in the Oil Services sector.

Disclosure: none

Comments

[UpNAmpd:]

I've been riding this tide via CALL options on OIH - it can be quite lucrative. In my view having oil as a proxy for the dollar will prove to be a losing position if the US President ever decides to stop adding to the SPR, or when Shell produces an updated geological survey of Iraq. Unfortunately, neither of these events will be short in coming.

2008 Apr 13 10:05 AM

[mixter:]

After having graduated with a geology degree from the University of Okla. (one of the better geology schools in the world) in 1958, and being unable to find a job because there was a glut of oil on the world market, it really doesn't bother me one bit that the oil companies are reaping large profits. Only two graduates out of a graduating class of 136 were offered exploration jobs that year.

Where was Teddy Kennedy and his ilk at that time? Why didn't they do something to help out?

Where were all the bleeding heart liberals during the oil bust of the early 1980's when 600,000 people lost their jobs and numerous energy related companies went bankrupt.

I'll tell you where they were, sitting on their butts enjoying cheap energy prices. Well, now they are paying the piper! Serves them right!

2008 Apr 13 11:00 AM

[Ronmac:]

Agree with mixster. It is almost a waste of time for us to think the anti-oil company idiots will catch on. If there is a surplus, then attack them for environmental reasons, if there is a shortage, attack them for too high of prices. Ted Kennedy just stands out as one of the more well known idiots. In reality Congress, this one and the past ones, have all screwed us.

2008 Apr 13 01:47 PM

[Mongoose:]

Where is (" MR. SMITH goes to Washington" ) when you need him. They don't go to serve but to be served. VOTE for a DOG they will be loyal and happy to see YA.

2008 Apr 13 02:00 PM

[Kunst:]

I just have to wonder how high energy costs have to go before it makes a real change in American behavior. Many people are having trouble paying their home heating bills. Phoenix and Las Vegas would be (back to) 1/10th their size without air conditioning. $4 gas doesn't look like enough; I don't see people slowing down on the freeway. Somewhere there is a breaking point where the problem can't be ignored any more.

2008 Apr 13 03:23 PM

[Cousin A.:]

mixter: I agree that you certainly did attend one of the better geology schools. Too bad you didn't take an economics course or two while you were there. I've been thinking all these years that the ups and downs of the free markets were just part of the way they they work, and now you explain that it all had to do with Ted Kennedy, bleeding heart liberals, and Ronmac throws in Congress, and other "idiots". Thanks for clearing that up. And by the way, I don't know for sure, but Ted Kennedy was probably in high school or college in 1958.

2008 Apr 13 03:59 PM

[Urbane Gori...:]

Unless Mexico turns it's policies around and allows outside involvement in the government controlled oil business, their oil supply is expected to pretty much run out in 2010. As California gets 1/3 of its supply from Mexico, I'd say that we're going to be experiencing higher than the $3.67 regular unleaded we pay right now.

Saudi Arabia has been pumping salt water into its oil bearing fields for years. Engineers that know their supplies say that they do not have the capacity they are claiming. Perhaps they cannot pump the oil that George would have liked.

If you couple that with electric production in areas like Iran and Dubai, ( I believe they both have large plans for aluminum smelting and large consuming population growth ), you can see that they need their oil for their own purposes.

Not only do these issues easily offset any slow down in consumption for gasoline in the US as a result of a pending recession, but coupled with India and China etc's growth in demand ... I'd say we have a large problem looming in the near future...

As an aside.... Have you noticed that all these oil-producers have either been nationalizing (like Venezuela... Or obliquely like Putin's Russia), or diversifying (by buying businesses cheaply here and elsewhere) like Saudi Arabia and Dubai.. (and let's face it, maybe Iran really does realize that it's resources are limited.. Maybe they really do want nuclear power... ), or through government programs like China, going out and buying resource companies in Africa, Canada and South America..

And did you notice that the best Bush can do is go hat-in-hand to the Saudis????

Thx jegan ;-(

2008 Apr 13 05:50 PM

[Bo Peng:]

As the Bush admin winds down, so goes HAL, even if only for the perception of it. Buy other oil if you will, but I wouldn't touch HAL...no, wait, I might as well buy puts on it.

2008 Apr 13 11:00 PM

[E.D. Hart:]

In my little world, for what its worth, I prefer to blame the "compassionate conservatives" (an oxymoron if ever there was one) and "neo-conservatives" for the high oil prices.

Think what the $3 Trillion Iraq WAR funds would have done instead for national energy investments of all kinds. I have some engineering training, and a little economics, and with 3 trillion bucks I bet we could invest in a "Manhattan Project" style Energy Initiative that would put us on a sustainable energy path. How much research and results could 3 trillion buy?

Oops, we already spent it on Iraq. Never mind. I blame Teddy Kennedy for not stopping the War.

2008 Apr 14 01:14 AM

[AubSK24:]

will the election impact HAL? Can it? Maybe this is why HAL has (2) Corporate HQ's ... thoughts?

Last Thursday... 4/10.. new all time high.

Buy/Sell/Hold...
Help me out Jim Cramer..

2008 Apr 14 07:10 AM

[SD CDL:]

The Saudi's can't increase supply because they don't have it. This is the nasty secret that the Government doesn't want to tell the people...thinking they can fix the problem before it happens. Read Matt Simmons' book about Saudi oil and you'll see. They hide this because they don't want to spook the herd or incite hoarding and general chaos.

This nationalization of oil around the globe and war in Iraq(setting up a police station) are all chess board moves for later this century when resource conflict is open and regular. With billions wanting to live like America, shortages will ensue. Eventually a new source will overtake oil but the trillion dollar question is what...and is it in time.

Kind of bleak outlook but a gallon of oil is STILL cheaper than a gallon of milk and look at the backlash. It may be worth it buy a home close to work or a motorcycle with enough land to grow food for a family or two...just in case. Past returns do not guarantee future results.

Or we could breakthrough in sun or wind technology or something and forget the whole thing.

2008 Apr 14 04:11 PM

[SD CDL:]

I agree with both mixter and only partially to Cousin A, gov't intervention on both sides, subsidies in the down times, windfall "stupid" taxes in the good times is bad and invokes the law of unitended consequences. Businesses don't pay taxes, people do...because it is passed on, that IS business.

Eric H's point is moot because the 3 trillion is off balance sheet, you did not pay for it with this year's filing of taxes, or the year before...or the year before. We opened another credit card in the US taxpayer's name so since it was all borrrowed and will never be paid back, we couldn't have used it because technically it was never there. I'll agree that if we're going borrow 3 trillion we should have put it to finding alternative energy. The problem is that gov't isn't the best group for it...i.e. ethanol and the devastation it has done to corn (consumers that is). We will all pay for the war with inflation, the stealth tax. We'll never pay off the national day in real dollars anyways, it will be inflated away or rendered worthless when we switch to a new currency (Amero?).

Maybe we shouldn't have constructed our entire society on cheap oil...doh!

2008 Apr 14 04:36 PM

[Ames Tiedeman:]

Oil Trusts are ones to look at too:

PGH, PVX, HTE, AAV, and others

2008 Apr 14 09:09 PM

[finmah@yaho...:]

Forget the distractions , we have had 30 years of warning and while the rest of the world uses four sources of energy - our soundbite hacky sack crowd from green groups have successfully blocked every initiative for new energy -

Nuclear - block on waste disposal - rest of the world development as fast as possible
Natural gas - pipelines blocked, LNG terminals blocked -rest of the world ASAP
Oil drilling - 70% coast of US blocked - rest of the the Kyoto pact nations - levelling mountain tops - Canada, Norway anywhere -arctic- ASAP

Ethanol -biofuels -No can do- US is now responsible for world supply of cheap tacos while we fight alone for free oil shipping lanes to keep taco crowd happy.
Brazil - not criticized for using sugar cane - only us for using pig food - corn.

Leftist propaganda have molded a very dangerous energy policy - look at what the "leftist elite" Kyoto nations do for energy policy - France all nuclear, Canada - anything anytime, Russia China India Brazil - didn't have time to sit down at the propaganda table. Oh, did I forget to mention the use of diesel overseas for driving and the congestion?

The latest is a former presidential candidate who somehow right before another election has decided there is conclusive proof that our exhaling Co2 and our lifestyle is a problem requiring immediate government mandates - but the same philosophic group wishes to have millions illegally enter the energy nightmare and drive around with big homes.

So now the benchmark for alternative energy (for only the US) is it can't emit Co2 while you can light the rivers on fire in many parts of the world.

While the US consumes a disproportionate amount of energy - it is only 25% of the daily oil consumption. Looks like we will need more analysis of whether other key nations are truly following our anti-growth emotional policies. The movement begins and ends from campaign contributions and unfortunately the new Co2 policy if people are serious should eliminate oversized homes, vaction homes, vacation travel, and many recreational sports. And don't forget a tax deduction for rent instead of a mortgage deduction.

2008 Apr 15 09:11 AM

[jjason:]

WTF We're getting screwed by a monopoly called OPEC. Yes the supply does not meet demand. And yes, the demand keeps going up. And conservation of anything in the US is a hard thing to do. I am reducing the amount of energy I use to save my self money. I will cut back on the purchase of heating oil, gasoline and use more solar energy. If we all do this, a barrel of oil will cost less.

But the big problem now is in the credit markets and home foreclosures. Thankfully, I own my home, have no mortgages or loans and live within my means. The recession we are in will be bad for Americans who did not make smart decisions.

2008 Apr 15 09:34 AM

[losingmyass:]

Thanks falcon - THANK GOD! I knew it was a trick! But when and how does the trick end? Who is this trick on again?

2008 Apr 16 03:33 AM

[cynical and...:]

First, let me point out that it is true that the "radical greens" have increased the price of energy throughout this country. However, having visited china recently, I have seen first hand the cost of not having environmental regulation.

Second, It is probably not true that we are experiencing high oil prices due to the lack of production of oil or other energies. We produce a huge amount of energy. We consume and waste more than any other nation. Our sole national energy policy for the past half century (since it became obvious that we were going to become an oil importer) has been to encourage consumption with new highways, new construction building homes further into the farmlands, and the puchase of new out sized and inefficient vehicles.

Currently Mexico has seen it production capacity decrease, as has Norway, England, US, Iraq and just this week Russia. Interestingly Saudi Arabia's production is more than 1.5 million bpd below its peak production - though they claim that planned. How many of the worlds biggest producers will go through the same thing before we realize that it is inevitable and stop blaming oil companies, Arabs, or environmentalist and come up with a plan to help us conserve and use alternative sources.

2008 Apr 16 06:59 AM

[craigimass:]

Uh......hate to inform the Rednecks here - but.....

Bleeding heart liberals and hippies were burning wood stoves, moving out of the city onto organic farms, installing solar panels and in general TRYING to tell the rest of the population that cheap oil is not forever.....

Meantime, the soccer moms and SUV dads were CAUSING the crisis by not allowing our country to head in the proper direction. Sure, a generalization, but look at where the BIG houses are (redneck south) while the more reasonable new englanders and northwest population try to save energy.

Remember, this is bizzarro world - up is down and down is up. G W Bush is a good president....we are spreading "freedom" by killing 100's of thousands....and on and on.

2008 Apr 21 12:29 PM

[User 77845:]

folks german speaking
fo-tsx-v symbol
the machine-frotier oil
that means -conducting a new adventurt
time is but a walking shadow



e

2008 Dec 31 03:49 PM