When finding investments in the oil space, or any space, timing is everything.
That statement's no major secret -- of course, we want to buy stocks when they're cheap.
But maybe almost as important, we want to buy cheap stocks when they're ready to constructively move higher. It's one thing to buy a good stock at a cheap price, but those buys become less useful if the stock doesn't begin to rally for the first six months or more that you own it. That indicates wasted capital -- money that could have been better deployed elsewhere.
In oil stocks, we're confronted by that problem almost all the time, particularly now.
We're convinced that oil prices are headed higher -- unsustainable prices in the $50s just cannot deliver enough of a margin to allow every producer to survive and continue to pump. This has been the thesis under which we've developed a portfolio of stocks for the long haul -- in better-capitalized, relatively unleveraged independent U.S. producers.
But what of other sectors of energy? There are literally hundreds of energy stocks that aren't U.S. independents -- and entire subsectors that are not engaged in exploration and production. What about them?
This is where the timing comes in. A renaissance of oil in general will lead to a more generalized renaissance in oil stocks. But there is a definite order in which the recovery will take place.
Take oil services, for example. Higher oil prices are also the most direct correlation to higher stock prices in oil services, but the recovery in oil prices -- when it comes -- won't translate to fast recovery in oil services stocks. Why? Because the boom/bust cycle in oil services is naturally behind the cycle for E&P companies.
As prices for oil disintegrated in 2014, oil producers were first to make top-line cuts, restructure debt and reorganize assets. Oil services companies could only slash prices and pray to compete for less and less work.
In 2017, much of the consolidation in oil E&P companies is done -- assets sold, debt restructured. For the oil services companies, however, their disaster is still in its early stages. Check out this piece from Bloomberg, comparing Canadian E&Ps (particularly depressed) to oil services companies. PricewaterhouseCoopers estimates that 48% of Canadian E&Ps are in no danger of bankruptcy. Yet oil services have only 34% in the clear. Further consolidation and restructurings are in the cards for oil services -- just as the E&Ps have been doing -- before the sector can confidently be invested in.
What's interesting about this sector, as with E&Ps, is that there are specific subsectors to watch as consolidation and restructuring continue. Just as in E&Ps, where we concentrated on independent U.S. shale players, we are going to focus on shale specialists to make the first big moves higher. That will include horizontal drilling specialists and proppant and frack water reclamation companies. Two names to keep in mind for the future (because no one is happy unless I include an idea or two) are Helmerich & Payne (HP) and Emerge Energy Services (EMES) .