Longtime readers of Oil & Energy Daily know that our top priority is to seek profits from what we call the “global resource chase.”
Well, today, I’m going to show you three ways to do just that. Because there’s a major transfer of wealth taking place right now and, unlike most, it’s open to the public.
You see, global spending on exploration and production (E&P) reached nearly $700 billion last year – a 10% increase from 2011.
[ad#Google Adsense 336×280-IA]The United States alone accounted for a record-high $200 billion of that amount (despite the fact that natural gas prices hit a record low last year and oil prices were only moderate).
And what’s more, E&P spending is poised to climb even higher this year both at home and abroad.
There are numerous reasons for this – borrowing costs are low, global energy demand is on the rise, company balance sheets are flush with cash, etc. – but the biggest continues to be profitability.
The cost to find and develop new reserves is about $45 per barrel, on average.
For natural gas, that number is close to $4 per thousand cubic feet (mcf). The companies are basing their drilling and exploration budgets based on price expectations of $86 per barrel for West Texas Intermediate (WTI) crude and $101 for Brent, and $3.62 per mcf for natural gas.
That margin of profitability has flung energy majors to the furthest corners of the earth in search of oil and gas.
All the usual suspects are leading the charge – Exxon Mobil (XOM) and PetroChina (PTR) chief among them.
Indeed, Exxon spent about $30 billion on exploration and production last year, with PetroChina close on its heels. However, PetroChina is actually expected to overtake its Western rival in E&P spending this year, shelling out $36.6 billion, compared to $33.9 billion for Exxon.
This is the kind of one-upmanship that exemplifies the global resource chase – two heavyweights, one from the East, the other the West, going head-to-head for vital energy supplies.
Follow the Money
So how can you profit from it?
Well, it’s not necessarily the producers you should be investing in – it’s the oilfield services companies, the “pick-and-shovel” plays.
I’m talking about companies like Baker Hughes (BHI), Halliburton (HAL) and Schlumberger (SLB).
Demand is strong and supply of equipment and services is tight. Even during the economic slowdown in the United States, major oil companies like Exxon, ConocoPhillips (COP) and Chevron (CVX) kept up a high level of spending, allowing for very little slack for equipment and services. So while prices for these services may have dropped, utilization rates were still high.
2013 will be a banner year for exploration and production companies. And oilfield services companies will achieve greater than normal returns, as a result. They’ll charge a premium for their services and equipment as E&P companies increase their spending by as much as 10% from 2012.
And that’s a trend that will continue for at least the next three to five years.
Right now, Baker Hughes, Halliburton and Schlumberger are all trading within 10% of their 52-week highs. And each one represents an exceptional buying opportunity on any pullback.
Bake Hughes sports the lowest valuation of the three companies mentioned above, trading at a slightly lower price-to-earnings ratio and a much lower price-to-book ratio. But based on the current trends in energy spending, any one of the three would make a strong investment candidate – especially during a general market pullback.
And “the chase” continues,
Karim Rahemtulla
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Source: Oil & Energy Daily