There is a natural resource land grab going on this country unlike anything seen since the California gold rush. The prize is oil and gas this time and it is changing this country’s energy equation. New "fracking" technology is opening vast new tracks of reserves throughout North America. This country overall has reduced its energy dependency from 60% imports in 2005 to 47% in 2010 due to this boom. It is quite possible that number may be under 30% or less by 2020. To give but one example, North Dakota has quintupled its oil production over the last half decade. It now produces over 500,000bpd which ranks it above Ecuador, which is an OPEC member.
Fortunes have been and will continue to be made by firms that were prescient enough to buy acreage early in the cycle and have successfully deployed technology to open up reserves that were unreachable until recently. I would love to have a research team on the ground to find the small producers that w ill end up being bought out by the majors for large premiums. Unfortunately, I don’t have that team to deploy so I am going to make my money the same way it was made in the gold rush, by buying the companies supplying the "Picks & Shovels". In other words, the best way to profit is to invest in the companies that are providing and improving on the "fracking" technology that is making this energy boom possible. Not only are these firms benefitting from the North American reserve build out, but they will able to use this knowledge to expand production in Europe, China and other countries. Here are three oil services firms I like at these price levels.
Baker Hughes (BHI) – "Baker Hughes Incorporated supplies wellbore related products, and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the oil and natural gas industry worldwide. It also provides products and services to the downstream refining, and process and pipeline industries". (Yahoo Finance)
Fracking technology improvement: Its "DirectConnect" fracking technology is targeting releasing gas and oil deeper in the formation. It is also testing disintegrating frack balls that dissolve within half a day.
Four reasons Baker Hughes has value at $48 a share:
- Baker Hughes is showing rapid EPS growth. The company earned $2.22 a share in FY2010, should make $4.31 in FY2011 and analysts believe it will turn $5.52 a share in FY2012.
Baker Hughes has a five year projected PEG of just .36 and booked 35% plus revenue growth in FY2011 and is projected to grow revenue growth of over 15% in FY2012.
The mean analysts’ price target on Baker Hughes is $75 and Credit Suisse has an "Outperform" rating and a $80 price target on the stock.
The stock looks like it has tech nical support at $45 level as it has bounced off that price level twice. (See chart)
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Halliburton (HAL) – "Halliburton Company provides various products and services to the energy industry for the exploration, development, and production of oil and natural gas worldwide. It operates in two segments, Completion and Production, and Drilling and Evaluation". (Yahoo Finance)
Fracking technology improvement: The company is developing a plan it calls "frack of the future" that offers better technology to reduce the need for materials and labor for each well in addition to speeding up and increasing production. It also deploys a system called "RapidFrac", which is a series of sliding sleeves that open throughout the horizontal well bore to isolate zones for fracking.
Four reasons Halliburton is a buy at $34 a share:
Credit Suisse has an "Outperform" rating and a price target of $59 on Halliburton. S&P has a "buy" rating and a $48 price target on the stock.
It has a very low five year projected PEG of .39 and is selling for 10 times operating cash flow.
The company will increase earnings by over 60% in the current fiscal year. It made $2.06 in FY2010 and should make $3.34 in FY2011. Analysts currently have $4.13 a share pegged for FY2012 for Halliburton.
The stock looks like it has technical support around the $30 level (See chart).
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Schlumberger (SLB) – "Schlumberger Limited, together with its subsidiaries, supplies technology, integrated project management, and information solutions to the oil and gas exploration and production industries worldwide". (Yahoo Finance)
Fracking technology improvement: Schlumberger improvement on fracking technology is called HiWay. The comp any’s product injects material to prop open wider pathways for the oil and gas to flow. This product reduces the water and sand use needed. Twenty companies now use this technology compared to two a year ago.
Four reasons Schlumberger is a buy at $68 a share:
The company is showing consistently growing earnings. The company made $2.86 a share in FY2010, should earn $3.65 in FY2011 and analysts believe it will make $4.89 a share in FY2012.
The median analysts’ price target on Schlumberger is $90 and S&P has a "Strong Buy" rating and a $94 price target on the stock.
The company has a five year projected PEG of .79 and several insiders bought new shares late in 2011.
It has an A+ rated balance sheet and is probably the best positioned oil services firm overseas, especially in Brazil.
Disclosure: I am long BHI, HAL.