Following a plethora of jumps and drops, the price of crude oil rose an impressive 45% last year. This helped ‘Energy’ to be crowned as the top performing S&P sector in 2016 with a market-thumping 24% return.
By February, prices plunged all the way to a low of $26 per barrel, thanks to the boom in shale oil production and rising output from OPEC. The dramatic slide prompted several analysts to make bold calls on a potential bottom. While some suggested prices might drop as low as $20 a barrel, gloomier estimates called for a sensational $10-per-barrel floor.
But thankfully, none of these bone-chilling forecasts were correct.
A historic OPEC production cut agreement, together with help from non-OPEC producers and slashing investments (in existing and new wells) have seen oil prices more than double from their last February lows to $54.
A Better Climate for Oil Producers
While all crude-focused stocks stand to gain from rising commodity prices, companies in the exploration and production (E&P) sector are the best placed, as they can extract more value for their products. Consequently, with oil prices recently jumping to their highest levels in 18 months, upstream firms are hoping for an untick in their their revenues, earnings and cash flows.
Good News for Oilfield Service Players
While the oil price rebound is good news for E&P stocks, it also translates into a better market for oilfield service providers. This industry includes providers of technical products and services – from locating hydrocarbons to optimizing production through the life of the field – to companies drilling oil and gas wells.
If the producer selects the area to drill for oil and arrange finances for the operation, it’s the service providers who supply the tools, equipments and the manpower to make the exploration and then production possible.
Among such companies, Halliburton Company (HAL) and Schlumberger Limited. (SLB) warrant particular mention. With their massive market capitalizations of $50 billion and $120 billion, respectively — they dominate and define the Oil and Gas – Field Services industry, which is ranked 77 out of the 265 industries in our coverage (top 29%).
The broader ‘Oil and Energy’ sector of which they are a part, is also positively placed at number 2 out of a total 16 sectors we cover (top 13%).
Let’s take a look at both HAL and SLB: