Playing In The Oil Patch

9/1/2014


The U.S. shale boom has transformed the oil industry, with domestic production leaping 48% since the end of 2011. In October, U.S. oil production exceeded imports for the first time in nearly 20 years. By 2020, the U.S. will surpass Saudi Arabia as the world's largest oil producer, predicts the International Energy Agency.

In a delicate equilibrium, North American drillers must strike the right balance on multiple fronts: raising production without depressing prices, while extracting the fuel without causing environmental damage that angers locals and sparks onerous legislation.

S&P 1500 ENERGY SECTOR LOOKS SOLID
Six of seven S&P 1500 energy industries have averaged higher year-to-date total returns than the S&P 1500 Index average of 5%. Many of the industries also offer superior growth prospects for year-ahead earnings per share. All numbers shown below are averages.
YTD
Total
Return
(%)
12-Month
-- Growth --
Est. EPS
Growth,
Next 12
Months
(%)
--- P/E Ratio ---
----- Quadrix Scores -----
S&P 1500 Industry
(No. Of Companies)
EPS
(%)
Sales
(%)
Trailing
On Est.
EPS For
Next 12
Months
Momen-
tum
Value
Overall
Coal & Cons.
Fuels (4)
(13)
NM
(9)
NM
29
29
52
75
64
Integrated Oil &
Gas (4)
9
(3)
(5)
4
15
14
70
85
72
Oil & Gas
Drilling (12)
12
(3)
7
5
15
12
44
70
51
Oil & Gas
Equipment (28)
6
5
8
23
23
17
58
63
61
Oil & Gas
Exploration (36)
11
(8)
22
15
24
23
59
63
63
Oil & Gas
Refining (7)
24
(30)
6
30
16
12
52
61
64
Oil & Gas
Storage (4)
30
(7)
12
16
42
35
45
67
63
S&P 1500 Energy
Sector (95) Avg.
10
(4)
12
16
23
19
56
65
61
S&P 1500 Index
Average
5
7
8
12
22
20
54
57
60
Notes: Quadrix scores are percentile ranks, with 100 the best.     Growth rates above 75% or below -75% and P/E ratios above 75 and below zero are excluded.     NM Not meaningful because not enough companies had data.

Drilling is a capital-intensive industry that demands ever more resources just to run in place. New shale wells tend to experience much sharper rates of decline over time than traditional wells, resulting in heavy, continued investment to maintain production. Drillers in the Bakken shale formation need 2,500 new wells each year just to keep production flat, compared to 60 in a conventional field in southern Iraq, according to the IEA.

Rising supplies have depressed U.S. oil prices. West Texas Intermediate, a benchmark for U.S. crude, has historically sold at a slight premium to Brent crude from the North Sea. But since late 2010, when U.S. production spiked, WTI has traded at a discount. WTI prices could rise if U.S. export restrictions continue to loosen.

The government allowed two companies earlier this year to export lightly processed oil, and 10 more firms have reportedly applied for similar permission. Many U.S. refineries cannot process shale oil.

The rising tide is lifting all boats connected to the industry, including oilfield-services firms. North America accounted for 33% of Schlumberger's ($111; SLB) sales in the first half of 2014, compared to 17% in 2009. Halliburton's ($70; HAL) North American sales have nearly tripled in the past five years, while total company revenue has doubled. Meanwhile, demand for sand, a key ingredient for hydraulic fracking, has surged. Same goes for the railcars that haul crude oil. Sister newsletter Upside recommends railcar lessor GATX ($66; GMT) and two railcar makers, Greenbrier ($71; GBX) and Trinity Industries ($48; TRN).

Low energy costs are benefitting Dow Chemical ($53; DOW) and other U.S. manufacturers. Hydrocarbons and energy accounted for 38% of Dow's operating expenses last year; prices for both tend to follow those of crude oil and natural gas. Dow manufactures petrochemicals, accounting for 17% of revenue.

Last year, Dow's operating profit margins reached their highest level since 2006 — and they continued to rise in the first half of 2014. The company has also made several investments in the U.S. Gulf Coast to take advantage of low energy costs. Dow is a Focus List Buy and a Long-Term Buy.

TOP PICKS EXPOSED TO NORTH AMERICAN DRILLING
Several stocks recommended by the Forecasts and our sister publication, Upside, which focuses on smaller stocks, are linked to the surge in North American oil and natural-gas drilling. Not all companies reside in the energy sector. Industrial stocks GATX ($66; GMT), Greenbrier ($71; GBX), and Trinity Industries ($48; TRN) benefit from rising demand for railcars used to haul crude oil. Dow Chemical ($53; DOW) has seen its profit margins jump as an abundance of energy supplies has kept input costs in check. Upside stocks are in bold.
Total Return
12-Month
--- Growth ---
Est. EPS
Growth,
12 Mo.
(%)
----- P/E Ratio -----
------- Quadrix Scores -------
Company (Price; Ticker)
YTD
(%)
3
Months
(%)
EPS
(%)
Sales
(%)
Trailing
Forward
12 Month
Momen-
tum
Value
Overall
Industry
Carrizo Oil & Gas
($60; CRZO)
34
4
NA
39
48
25
17
69
61
67
Explor. &
production
Dow Chemical
($53; DOW)
21
5
42
2
21
20
16
55
55
72
Diversified
chemicals
EOG Resources
($109; EOG)
31
5
138
20
15
21
19
85
70
93
Explor. &
production
GATX ($66; GMT)
29
6
37
7
3
15
15
72
69
86
Trading
companies
Greenbrier ($71; GBX)
117
28
86
21
46
26
18
99
36
85
Machinery
& trucks
Halliburton ($70; HAL)
38
9
27
6
43
20
14
88
60
95
Equipment
& services
Panhandle Oil & Gas
($60; PHX)
80
10
153
35
58
23
15
60
52
79
Explor. &
production
Schlumberger
($111; SLB)
24
9
24
8
20
21
18
77
59
88
Equipmen
t & services
Trinity Industries
($48; TRN)
79
13
105
36
11
14
13
97
80
100
Machinery
& trucks
Whiting Petroleum
($91; WLL)
47
28
5
26
22
19
16
88
54
94
Explor. &
production
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not available.

 


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