After bottoming hard early in 2016, oil prices are on the rise again with Brent crude once again above $70/barrel. Numerous geopolitical developments are providing a strong tailwind. New Trump administration officials (new Secretary of State Mike Pompeo and new National Security Advisor John Bolton) are expected to take a more hawkish stance on Iran with new sanctions potentially disrupting Iran’s oil production. Also, OPEC and Russia, the world’s first and third biggest producers, respectively, are reported to be working on a long-term deal (10-20 years) to control output.
Earnings Growth and Dividends
In this environment of rising oil prices, U.S giant Chevron (CVX - Free Report) has seen Zack’s consensus earnings estimates for 2018 rise 19% over the past 90 days (from $5.33/share to $6.35), topping rivals Exxon Mobile (XOM - Free Report) at 14% and Valero (VLO - Free Report) at just 6%.
Chevron is a hugely diversified energy company involved in oil exploration, production, transportation, and the manufacture of petroleum byproducts, putting them in a position to benefit from rising oil prices in several areas. The Zack’s consensus $6.35 EPS estimate for 2018 is a whopping 71% increase over 2017.
Chevron pays an attractive 4% dividend and has a long history of raising the dividend aggressively, which it is able to do because of its excellent cash flows, especially after having cut operating costs aggressively during the lower oil prices seen in 2016/2017.
Selling Shovels in a Gold Rush
Have you heard the story about the general store owner who got rich in 1849 not by mining for gold, but by selling shovels to prospectors? We can apply this logic to the energy markets by taking a look at oil service companies who make oil exploration and extraction possible.
Some believe that higher global oil prices will encourage additional shale drilling in North America, adding supply (despite the efforts of Russia and Saudi Arabia to restrict it), and dampening the rally.
Who Benefits from Additional North American Drilling?
Industry leader Haliburton (HAL - Free Report) operates around the globe in virtually every aspect of the upstream oil business. Though smaller than industry behemoth Schlumberger (SLB - Free Report) , Haliburton holds a dominant position in the North American markets, where shale drilling is expected to increase in response to rising global prices. U.S. production alone in 2018 is projected to surpass 10 million barrels/day.
In 2016 Haliburton took the prescient step of increasing capacity by returning idled equipment to service during a period of low oil prices - when competitors were decreasing capacity.
Despite having beat earnings estimates in each of the previous 14 quarters, it’s been a tough year for the stock as it was dragged down with the entire energy sector. Now attractively priced with a current P/E of 18.6X (versus nearly 30X for Schlumberger), Haliburton is poised to capitalize on the global events affecting the energy markets.
A Small Cap Oil Services Option
Currently a tiny player in the oil field services industry, Flotek (FTK - Free Report) provides prescriptive chemistry solutions for oil drillers and drilling service companies that aid in well construction, increase oil recovery, and maintainence of equipment. Currently a Zack’s Rank #1 (Strong Buy), Flotek is expected to grow earnings significantly over the next two years, from a loss of $0.07 last year to a profit of $0.32 in 2018 and $0.52 in 2019.
Obviously, due to its small size (market cap $256M), Flotek is an extremely speculative investment and could be subject to fairly extreme price volatility. Consider it more of a “trade” than a buy-and-hold investment.