Playing the Benefactors
Given the bullish trend toward higher capex spending by the major oil firms, the long-term picture is rosy for the oil service industry. Exxon’s latest budget is testament to the dollar amounts that firms must spend if they want to stay in business.
The SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:XES) continues to be my favorite way to access the sector. The fund uses an equal weight strategy to track 44 different “pick-n-shovel” plays with the oil services industry. Top holdings for the fund include offshore vessel operator Tidewater (NYSE:TDW) and driller Transocean (NYSE:RIG).
The fund also gets the nod in the expense and return department, costing less (0.35%) and producing better returns than its larger market cap-weighted rival, the iShares Dow Jones US Oil Equipment Index (NYSE:IEZ). The fund provides investors a wide play on the trend of increasing capex spending and could be a good starting point.
Those looking to piggy-back directly on Exxon’s huge budget might want to go with venerable oil service stock Halliburton (NYSE:HAL). Exxon’s purchase of XTO gave it access to a plethora of shale assets, and in the face of lower natural gas prices, the firm is moving toward boosting production of natural gas liquids (NGL) and shale oil. Halliburton will be a direct beneficiary of that shift. Generally, when a big company needs something done, it often will go to another big company to fill that need. Halliburton’s leadership position in North America makes it the ideal partner for Exxon across a variety of projects. The oil services stock’s 1,000 HP fracking pumps are the industry standard when tapping into hard shale rock, regardless of fuel type.
Halliburton shares are cheap too. Like BP, the firm is suffering from a “Macondo Hangover.” However, unlike BP, much of the service firm’s legal responsibility has been expunged, and the chance of a huge payout seems unlikely.
Shares of Halliburton can be had for a cheap P/E of 11 and currently sit about $23 below their 52-week high. That could be a huge bargain as Exxon and other E&P firms most likely will choose the oil service giant as their partner on a variety of projects.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.