In last weeks video, which you can watch here, I talked about the speculative opportunity in the oil service sector. To summarize, my contention is that due to the low oil prices suffered by the oil industry in 2014-2016 the industry was forced to cut back spending on exploration, development, and reserve replacement.
The chart above is one I have shown in the past. Some of the largest oil companies in the world have cut their capital spending in half over the last few years. As oil is an extractive industry, every barrel produced must be replaced or at some point you will go out of business.
Because cashflows were constricted during the last oil price collapse companies pulled in their horns to preserve cash. They have not been replacing barrels.
This lack of spending reverberated down into the oil services companies. These are the companies that provide services to the oil explorers and producers that enable them to find, drill, and produce oil and gas.
The oil services industry is notoriously cyclical and seems to be either booming or busting. The oil industry recently went through what is described by many people in the industry as the worst depression in a generation. Because of this many companies either went out of business or were forced to merge with competitors.
Yesterday, for example, Transocean just announced the acquisition of offshore oil drilling competitor Oil Rig Inc. Transocean
In the short term this is bad for investors but this culling of the herd is now setting up to provide a tremendous speculative opportunity for those that understand the industry dynamics.
Oil prices have risen over the last year with Brent crude over $75 and WTI around $70. As the price stays at this level or moves higher oil company managements will become more confident and are beginning to authorize spending on new projects and maintenance on older projects.
As this spending takes place it begins to trickle down to the oil service providers. We are already beginning to see this turn if comments from two of the larger service providers are any indication;
On the whole, we continue our steady march out of the worst oilfield downturn of a generation, and I am very proud of the fight that our employees have demonstrated as we’ve navigated this ordeal.
NOV has emerged with a great team focused on producing great results for our customers and our shareholders alike. All three business segments performed well during the second quarter. In fact, all three posted double-digit revenue growth sequentially, with each segment benefiting from stronger second quarter demand in most major international markets. ~ National Oil Well Varco 2nd quarter earnings call.
And comments from industry leader Schlumberger;
The broad-based recovery in the international markets has now finally started, which led us to recover sequential revenue growth in almost all geo markets and nearly product lines in the second quarter. ~ Schlumberger second quarter earnings call
We are in the early stages of a oil industry recovery. Obviously, many things could happen to derail the recovery; economic slowdown, lower oil price, and trade wars. Nevertheless, the world is using around 100 million barrels of oil per day. Every barrel produced requires a new barrel that needs to discovered and developed.
That requires hundreds of billions of dollars per year that needs to be spent. It has not been happening for the reasons discussed above. As oil companies begin another spending cycle there are less service companies to provide service. This means more business for the survivors. Now is the time to take a position in this business.
In the current months Actionable Intelligence Alert I profile a company based in Norway that is down over 90% from its highs. The company is now recovering and is both profitable and cashflow positive. These are the type of speculations that I focus on in the monthly newsletter.
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