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Oilfield Services Sector & Forget About Natural Gas
By Dian L. Chu, Economic Forecasts & Opinions
The market's upward momentum this year has hordes of investors still looking for opportunities with good entry points. Finding them is tough because markets can turn quickly and many sectors are already fully valued. Nonetheless, with crude prices hovering around the $70 per barrel range, even with reduced demand, oilfield services remains one of the more promising sectors still with room to grow.
The following are some of the emerging trends setting the medium to long term outlook for the sector:
North America Natural Gas – Check Back in 2011
Baker Hughes (BHI) and BJ Services (BJS) $5.5 billion stock and cash deal is the first major merger in the oilfield services sector since energy prices collapsed last year and the biggest merger in the sector for a decade. It will boost the size of Baker Hughes’ pressure pumping business to provide more than 20% of its revenue, from less than 1% today. Baker Hughes once owned BJ Services but spun it off in the early 1990s.
This merger tells investors three things:
( 1 ) BJ Services is the number three player in the pressure pumping business with 73% of its revenue generated from the North America region. BJ Services’ exit at this point suggests the North America onshore shale gas market is not expected to rebound any time soon, and this is a marriage made in recession.
( 2 ) This is a strategic move by Baker Hughes suggesting a diversified suite of services is becoming more important to compete and win contracts with majors and larger independents.
( 3 ) The better revenue prospect lies in the overseas market, as BJ Services has far less the international presence of Baker Hughes.
In addition, as the graph indicates natural gas has decoupled from the commodity and equities markets. (Fig. 1) Both the fundamental and technical signals are extremely bearish for natural gas with some analysts predicting a sub $2/mmbtu price scenario. Due to various market factors, it is likely that natural gas will stay on this bearish path at least through 2010, and unlikely to be a factor for the services sector, assuming no major hurricanes or an unusually cold winter.
Deepwater Oil to Drive Growth
BP PLC (BP) announced a major new oil find, called the Tiber well, one of the latest in a string of discoveries in the Gulf of Mexico (GoM) that cements the prospects for the Lower Tertiary region as one of the oil world's most promising exploration regions. Tiber, with an estimated 3 billion plus barrels, is at a depth of more than 35,000 feet, greater than the height of Mount Everest.
This is part of a new frontier in exploration where oil companies are spending billions of dollars to find oil on the bottom of seas offshore in places such as Brazil, The North Sea, and West Africa. These discoveries were made possible by new technologies now capable of unlocking deep deposits that were before either undiscoverable or too costly to exploit.
The U.S. also has lower taxes, royalties, oil payments and other levies than most other governments. This combination of financial and geologic advantages will support the continuing growth of the deep-water GoM. Since most of the oil majors have backwardly integrated services operations, and rely on third party services companies to supplement their own activities, this new find by BP PLC (BP) could translate into more work for the deepwater services sector over the next couple of decades.
North America Onshore M&A to Intensify
The oil and gas sector has been hemorrhaging due to the factors of the economic downturn, the credit squeeze, falling commodity prices and an extreme pricing environment. For example, during its earnings calls, BJ Services (BJS) indicated that the average pricing for its products and services was down about 35% during the 1st half of 2009. There are indications that the average oilfield services pricing was down another 10-15% from late 2nd quarter levels.
The Baker Hughes (BHI) and BJ Services (BJS) merger is one of the first signs that the valuation gap is finally narrowing between potential buyers and sellers. After free falling from the 4th quarter of 2008, the rig count in the U.S. has begun to creep upward, now breaking 1,000 from the low point of 876 in mid June. This could spur more M&A activity, particularly in the North America Onshore services sector, before values start rising again along with commodity prices.
From that perspective, both Schlumberger Limited (SLB) and Weatherford International (WFT) could be ready to acquire smaller players in the sector, with small niche players like Smith International (SII) and Newpark Resources (NR) as potential targets.
Sector Strategy
The entire oil patch is not likely to resume growth till oil prices stabilize for at least 6 months or longer around the $70-75 a barrel level, which seems to be the ‘fair price’ that OPEC demands.
Ergo, for investment in the services sector as part of a long term portfolio holding, investors should seek out companies with an international deepwater niche such as Transocean, Inc. (RIG), Technip (TKP), Oceaneering International Inc. (OII), and Tidewater, Inc. (TDW).
ETF investors should research whether the following Exchange Traded Funds meet similar investment objectives: Oil Service HOLDRS ETF (OIH), Dynamic Oil & Gas Services (PXJ) and SPDR S&P Oil & Gas Equipment & Services (XES), which can be less risky than investing directly in specific companies.
By Dian L. Chu, Economic Forecasts & Opinions
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It will be interesting to see if more M&A activity occurs in the North America onshore services sector. There definitely is a window of opportunity here as asiablues points out.
Track this Oil Services call over time...
http://bit.ly/14LoBX
Who in their right mind names their company BJ Services?
BJ?
Blow Job, cmmon you are not that naive....
While Baker Hughes might be a far more international player than BJS, it's still pretty domestic. A company in its niche needs to have a ton of overseas capability, and it's far behind Schlumberger and Halliburton.
mainlining Foreign Oil = continuous Foreign War
Being addicted to foreign crude oil becomes the takers's economic lifeblood and requires a fight to the death..never by the profiteer's children. We are not so dumb as blind and on the take; the consequences never escape. Vote for immediate incentives for domestic sources and disincentives for foreign sources..get smart and moral and buy some peace.
Then what would an elected president have to wag the dog, or cover up, so to speak, an incompetent presidency.
So far, we've had three in a row of the most incompetent turds ever elected to the office of dictator.
I'll just be happy if Obama doesn't drop nuclear warheads somewhere in the ME to cover up his already miserable showing in office.
As long as thar's black gold in dem dar hills oversea's we'll be sending our children over to fight wars to continue giving us access to it. What else would you expect when we use 25% of the worlds energy output.
Until we value our children more than we value our oil dependent lifestyle we will send kids to die over hydrocarbons.
Is Obama serious about getting off foreign oil?
http://abclocal.go.com/kgo/story?section=news/politics&id=6359976
http://uk.reuters.com/article/idUKN1154377920090511
Will The NAT GAS Act of 2009 really pass in October? http://www.msnbc.msn.com/id/32283162/ns/business-motley_fool/
The NAT GAS Act of 2009, H.R. 1835, was introduced in the House of Representatives on April 1 and has 77 bipartisan cosponsors. The Senate version of this bill, S. 1408, was introduced on July 8 by Senate Majority Leader Harry Reid and Senators Robert Menendez (D-NJ) and Orrin Hatch (R-UT).
http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&news...
What is the Putin Plan?
http://news.bbc.co.uk/2/hi/europe/7796806.stm
http://www.istockanalyst.com/article/viewarticle/articleid/3192613
http://www.jamestown.org/single/?no_cache=1&tx_ttnews[tt_news]=34888&tx_ttnews[backPid]=7&cHash=0cb36fe9f2
http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=20090806...
http://uk.reuters.com/article/idUKL617638420090806?pageNumber=2&virtualB...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNrwOK1CUmMA
Read it and weep. BP's PR machine about that deep oil find was all crap. There aren't 3 billion barrels of crude there.
There MAY BE 450 million barrels of crude and "crude equivalents" aka nat gas.
All lies. Oh, and that article didn't hit the wires until after the market closed that day.
The real kick in the ass comes a few paragraphs down.
"Before Tiber begins pumping oil, Hayward’s scientists must figure out how to coax crude from delicate seams of stone where temperatures can exceed 250 degrees Fahrenheit (121 Celsius), said Smith, a former Amoco Corp. geologist."
In zombie-speak, thar's black gold in dem dar hills, just don't know how to get at it.
"The Brine Pool is a crater-like depression on the seafloor filled with very concentrated brines coming from the Luann Salt Layer. The brine contains a high concentration of methane gas that supports a surrounding dense mussel bed.
"
http://oceanexplorer.noaa.gov/explorations/02mexico/background/brinepool...
Howard - what is an LP ?
It's a beast that gets you a K-1 around March 1st, like the USO and others...and if you held it and they made even more money, lucky you, you get taxed on it. Used to be my playground but not anymore. I got lucky when the UNG lost money and I did too--had an extra writeoff against profits last year. But there are horror stories on the USO out and about. Like an extra $10000 of vapor profits you get to pay the piper on. I stay away from all ETN LP's now.
LP = Limited Partnership. An example is Kinder Morgan Energy Partners, LP (KMP).
Want a pure play on nat gas without the pain of UNG--try the Canadian Nat Gas ETF GAS--and it is not a Fricking LP. Looking into Jan 2011 calls.
Crude Oil politics will trump every alternative every time. 6 million barrels per day imported from OPEC (EIA stats) times 365 days = 2.19 billon barrels per year times $70 per barrel = 153 billion USD per year exported OUT of the country where it can be stolen in various schemes. Being Howard Beale you know intimately the Paddy Chayevsky movie "Network" and have been read the riot act by Mr. Jensen (the voice of God) and the old game. Domestic-sourced energy is a blow to the heart... 'nuff said about natty gas. When it goes to nothing, GS and Standard Oil (jpm)CHASE Rockefeller will have bought it for peanuts; they'll own it and then you'll pay what it's worth.
It's a great country, America.
You should add something about the weather. The El Nino weather pattern in the Pacific appears to be suppressing storms in the Gulf / Carribean. If there is a weak storm season, that'll frustrate the hopes of folks long nat gas who were betting on storms disrupting production.