"Many experts believe that oil prices are at unsustainably low prices now, and they expect a sharp rise in the commodity price as supply and demand come back into line again," says turnaround expert George Putnam.
In The Turnaround Letter, he suggests, "If oil does begin to rise again, the oilfield service stocks could rebound sharply." Here, he takes a look at large cap plays plays on a rebound within the oilfield services sector.
"We all know that oil prices have fallen dramatically from their highs in the summer of 2008. But different types of oil-related stocks have reacted quite differently to the price change in the underlying commodity.
"For example, while oil itself has dropped nearly 70% from its 12-month high, the stock of the largest integrated oil company, Exxon-Mobil, is down only 26%, less than the stock market as a whole.
"At the same time, the largest oilfield services company, Schlumberger, is off by 66%, more in line with oil itself. And some of the smaller oil services names are down even more.
"We find this volatility in the oilfield service stocks intriguing. If the price of oil does begin to rise again, the oilfield service stocks could rebound sharply.
"Even if oil prices remain low for a while, we think the service stocks could perform reasonably well. Exploration activity slows somewhat when the price of oil drops, but it goes on nonetheless.
"Many of the world’s main oil fields are being exhausted, and so there is a continuous search for new sources. And most of the new sources of oil are in remote locations or very deep water, requiring increasingly sophisticated technology for which the service companies can charge higher prices.
"The stocks described below (in order of size) are in various sectors of the oilfield services industry, and they look appealing to us now:
"The market cap at Schlumberger (SLB) is well over twice the size of its next largest competitor. It is considered to be the only fully vertically-integrated oilfield company in the world. Schlumberger is cutting costs to help ride out the current downturn.
"Moreover, it sports a strong balance sheet that it can use to enhance its market share via investments in new technology and acquisitions. When the inevitable rebound in energy prices begins, Schlumberger will be a prime beneficiary.
"Halliburton (HAL) became a pure play oilfield services company about two years ago when it divested itself of its KBR engineering and construction unit.
"Management expects today’s downturn in general activity to last about three quarters, or into the second quarter of 2009. If they are correct, the stock could begin to rebound soon.
"FMC Technologies (FMC) is known for its expertise in services and equipment used in the deepest ocean drilling, including recently setting a new record well depth of 9,365 feet in the Gulf of Mexico.
"Among other attractions, the company has a strong presence in Brazil, which may become the new Saudi Arabia if its deep offshore fields are as productive as expected.
"Oceaneering International (OII) conducts the lion’s share of its activities under water. It is particularly strong in the market for remotely operated vehicles (ROVs) – unmanned underwater robots equipped with cameras and manipulator arms.
"ROVs are especially useful in the search for oil and the maintenance of drilling operations in deep water where much of the future drilling activity is likely to occur. "
The Stock Advisors