You can't glibly say "oil is too high," but the stocks are sure saying that.
There's been a relentless assault on the drillers here and I have to tell you either Brent is wrong or the stocks deserve to sell higher.
After my trip to the Bakken in North Dakota, I am more convinced than ever that West Texas Intermediate means nothing at all. It is a hub that's an outlier. The price is much higher, even as you might think that it's wrong, immoral or manipulated.
Secretary Geithner told me this morning, in answer to a question, that Brent is a fair price. That's something I disagree with. But let's take it at face value. If our nation is not going to support efforts to make natural gas a surface vehicle fuel, something that both Conoco (COP) and Sasol (SSL) have joined Shell in saying in the last few weeks, then oil is going to stay high because only we can bring down how much we use. And we still set the price with our profligate, sky-high and needless imports.
If that's the case, there will be no cessation in drilling, no peak in drilling, no decline in orders and no cutting of earnings estimates. That makes this group, which as always has been brought to its knees by ETFs -- in this case the Oil Service Holders (OIH) -- a buy.
My favorite is Schlumberger (SLB), if only because outthinking this group has always been a mistake. SLB's the best in the business. If you think that we are going to have an offshore drilling renaissance in this country and continued deep-water drilling by other national and private companies, then Ensco (ESV) works. Finally, if you think the Bakken and the Eagle Ford are able to restore the U.S. production to well north of 50%, which I think it possible, then you should be buying Halliburton (HAL) and Lufkin (LUFK) which are the two big service providers I saw when I visited there.
I think the price of oil is going to remain elevated and the price-to-earnings multiples of this group are more likely to expand than contract. It might just very well be the cheapest sector out there.
