The oil industry just needs to get slightly better and we can make a lot of money.
From October to December of 2018, the price of oil collapsed 45%.
The collapse in price caused a rout in the oil industry.
Shares of the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) fell nearly 50% over that same period. This drop makes sense, because production companies get paid based on the oil price.
In addition to the XOP drop, shares of oil service company VanEck Vectors Oil Services ETF (NYSE: OIH) fell 45% over the same period.
The drop for OIH however, is odd.
Drilling and fracking oil wells — the “oil services” these companies provide — are in high demand. While I expected to see prices come down, a sell-off nearly as deep as the producers’ is a lot.
Nevertheless, these dips give us an opportunity…
Let’s Take a Look
As you can see from the chart of OIH, this was a deep sell-off. Far deeper than we saw at the bottom of the oil market back in 2016.
We could say that the market hates oil service stocks today. To find oil prices as low as today’s, you must go back 15 years. The bearish behavior, however, doesn’t reflect the industry at all.
It’s important to remember that these companies are the plumbers of the oil industry. They drill the wells, frack them and connect them to the pipes that move oil. Without service companies there would be no oil industry.
Service companies don’t get paid off the oil price. They are paid by the day or by the hour of labor. They were in huge demand in 2018.
From Bearish Behavior to Bullish Opportunities
The Energy Information Administration is the big government watchdog for the energy industry. Its forecast for 2018 was an increase of 600,000 barrels per day (bbl/day).
That prediction was a huge understatement…
The U.S. oil industry added 1.6 million bbl/day of new production in 2018, demanding a huge effort from the drilling service sector.
While 2019 production growth may slow — it won’t stop. There are huge new pipelines going into West Texas that need millions of barrels of oil to fill them.
The service companies in the Permian Basin area will do well in 2019 — but not all of them.
You see, there are “haves” and “have nots” in the service business. Companies with the newest drill rigs and latest technology get the work. The older rigs sit idly on the sidelines.
We just saw the results of idle older rigs in action. Parker Drilling, an 80-year-old icon in the drilling industry, just filed for bankruptcy.
Parker Drilling hasn’t been making money — it hasn’t turned a profit since 2014. The company cited $579 million in debt coming due 2020 and 2022 for that main reason
Clearly, Parker Drilling is one of the “have nots” in the sector.
Not all is dark, however. There are other oil service companies that are doing much better.
Those are the companies that we’ll need to watch in 2019.
A bullish momentum should be around the corner for the oil service sector. When things go from bad to less bad, it is our cue to start making a lot of money.
Good investing,
Matt Badiali
Editor, Real Wealth Strategist