Energy And Oil Service Companies Look Good Long-Term

In the midst of all the anxiety about the credit crisis and fear the government will or will not step in to do something about it (in the end it will; whether the House will pass the “new and improved” Christmas tree version of the bill is an open question), there are a lot of stocks for which the basic business prospects will not change significantly.

I think the energy area is a prime example.  Will a slowdown in the world economy, particularly in the OECD [The Organisation for Economic Co-operation and Development, comprised of 30 member countries that "share a commitment to democracy and the market economy"], cause energy demand to fall?  Yes, of course it will. In the short term, oil prices will be lower, though China and India are still growing.  However, it will not alter the supply picture that much over the long- or even medium-term.

The fact is that it is getting more and more difficult to find new sources of oil, and the existing sources are being depleted at an alarming rate.  We are still getting close to peak world-wide oil production.  Yes, Congress has now allowed the oil companies to “drill, baby, drill,” but what are they going to drill with, a Craftsman cordless?

Drilling rigs and the experienced crews to man them remain in short supply.  Even assuming that we find pretty significant amounts of oil in the eastern Gulf of Mexico, it will not be available for several years and will not make a significant change in the world-oil picture. There is both a real need and the cash available to build new and upgrade existing drilling rigs, which means that business will remain very strong for a firm like National Oilwell Varco (NOV).

The only real hope for finding big new oil fields is in deep water.  Those rigs are very scarce and are mostly already chartered for more than three years at daily rental rates of well over $500,000.  The owners of those rigs have already locked in years of fabulous cash flow.  There is next to no risk that the firms renting these rigs are going to default.

You want to find a strong balance sheet these days, well take a look at Exxon’s (XOM).  Does Chevron (CVX) have to tap the commercial paper market? Of course not.  So what difference should it make to them if the CP market dries up.  Is turmoil in the credit default swap market going to affect Conoco (COP)?  I don’t see how it does to any significant degree.

Are the customers of Halliburton (HAL) or Baker Hughes (BHI) going to disappear because credit is hard to get?  There may be some political risk in dealing with the national oil companies that now dominate the world energy scene, but I seriously doubt that a company like Petrobras (PBR) is going to go off the deep end.

Yet despite all this, the two companies that dominate the market for deepwater rigs have been cut in half over the last few months.  Yes, right now there are many falling knives, but Transocean (RIG) and Diamond Offshore (DO) are made of sterling silver.

The market is throwing the babies out with the bathwater.  This is the stuff great investment opportunities are made of.  Start accumulating energy stocks with strong balance sheets and oil service companies with solid backlogs.  I don’t know if they will turn around tomorrow, but I do know that they will deliver far better earnings over the next few years than most firms will, and that they are trading at much lower valuations than most companies.

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