What You Think You Know About the Oil Patch Could Cost You Big Gains

oil-services-oih

Investors hate the oil sector right now. I found that out talking to attendees at this year’s Sprott Natural Resource Symposium last week. The narrative is simple: Oil is expensive to extract, and there is no way these companies can make money at $50 per barrel.

That is a nearly unanimous sentiment.

However, it’s not true. A recent study by Bloomberg shows that giant companies like BP PLC (NYSE: BP) and Royal Dutch Shell PLC (NYSE: RDS) cut costs and improved operations. Now they are raking in the cash.

These giants made more cash in the first half of 2017 than they did in 2014, when oil prices averaged $109 per barrel. That sent shares ripping higher. Shell shares are at their highest value in 2 1/2 years.

However, there is one sector that will benefit alongside the majors…

Big, Familiar Companies

The big oil service companies, like Schlumberger Ltd. (NYSE: SLB) and Halliburton Co. (NYSE: HAL), are what make these operations run. It doesn’t matter where I go in the world, those big, familiar companies operate there.

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A few years ago, I flew halfway around the world to go see a flow test in Papua New Guinea. That’s when the companies test a well to gauge the quality of the oil and gas they found.

It took forever to get there. I had to fly an hour or so over the jungle in this fat-tire airplane that could land on dirt. Then I took a helicopter from there to the well site. I arrived to see the familiar sight of Halliburton signs on the rig.

Same thing happened when I went to Kurdistan in northern Iraq. It doesn’t matter where in the world you work: If you want to find and develop oil, these are the companies you hire. Period. So, when I see record cash flows from major oil companies, the simple next step is to look at the big service companies.

The sentiment is nearly unanimous: Oil is expensive to extract, and there's no way oil companies can make money at $50 per barrel. However, it's not true.

This is a chart of the VanEck Vectors Oil Services ETF (NYSE: OIH). As you can see, it appears we have an opportunity. There is zero chance that the service companies will continue to fall if the major oil companies are making record gains.

That’s because the service companies can raise their rates. That’s what happened before, and it will happen again. There is just a lag right now.

The service companies, like the oil companies, took a huge hit in 2015 and 2016 as oil prices fell. They had to make major cuts to survive. Many managers who were behind desks, managing crews, were forced back out on the rigs as companies reduced staff.

The price these companies charge oil companies is flexible. I expect rates to begin rising. More earnings will drive the shares of these companies higher.

This looks like a great time to put some money to work in OIH.

Good investing,

Matt Badiali
Editor, Real Wealth Strategist