The Tycoon Report

How to STILL Make Money trading Oil

Happy days are here again, or so it feels. After a bitter market winter, stocks are looking like they are finally finding some traction. Of course “sods law” applies (“Murphy’s law” for anyone not from the UK), because by time you read this, the market will probably be down 200 points!

With the level of rampant pessimism and general feeling of malaise that stock market talk currently engenders, I would have to view any sharp retreat here as a buying opportunity. But then again, I’m an optimist and have never seen anyone make money long term betting against US prosperity. (Cue the gold bugs and their endless America is ending tirades!)

The most boring discussion right now is “Are we in a recession?  Are we going into a recession?”  Blah, blah, blah. That’s all media misdirection, the market has already priced in a meaningful slowdown when it went down 20%! As investors who buy stocks/sectors, all we need to ask ourselves is which stocks are going to have above average earnings growth. Those are the stocks that will roar back when market sentiment changes.

Remember: stock prices are slaves to earnings or the expectation of earnings. Down periods, like the one we are in right now, give us the opportunity to pick off the stocks that have great earnings growth, but are the proverbial “babies” that have been thrown out with the bath water.

Ok, so you’re asking yourself: what stocks and sectors fall into this high earnings growth category?

Well it’s not rocket science guys. This is all stuff that you’ve heard before.

Energy, Food, Metals, Heavy Equipment, etc... we are in a cyclical boom time for commodity and commodity related stocks. One of the strongest sectors that you need to be looking at right now is the oil service stocks. Oil service stocks are companies that serve the oil industry. These companies provide services from deep water drilling to helicopters, from geologists to drilling equipment.

The oil service sector has YEARS of baked in above average earnings growth on their books in the form of business backlogs. The prevailing fear being voiced by the naysayers is that these contracts can be voided or renegotiated if oil prices suddenly collapse. That’s exactly what occurred in the 1990’s when oil fell from the low $30’s to $10 a barrel.

The oil service customers basically said “bugger off - we’re not paying!” and the oil service companies were forced to renegotiate. The fundamental difference is that the oil run of the mid 90’s was just a preliminary test; it wasn’t the main event in oils move.

That has all changed. We are now in a super cycle of price acceleration in oil assets. We’ve reached a point in oil prices where even a 50% drop will still have the oil companies looking for oil 24 hours a day seven days a week. But guess what? Oil reserves are dwindling, and most conventional oil fields are already at max capacity. The oil companies must find and develop new oil wells to meet new global demand.

It’s this “black gold” rush to acquire and develop new oil producing assets that will provide the thrust behind the huge earnings power of the oil service industry.

But isn’t it too late to play this space?

I know that many of you may be asking this question, and, yes, the sectors had a huge run over the last 3 years. These stocks will typically trade at peak valuation levels of about 32 times earnings. Take a look at a stock like Transocean Sedco (RIG). RIG is a key player in deep water drilling; their backlog of business is in the billions, but their PE? Just a lowly 12 times earnings!

Throw a rock right now and you are going to find a cheap oil service stock. This group is more undervalued now than it was in 2005. That’s how cheap these stocks are. The thing to remember about oil service stocks, however, is that they are volatile with a capital V. The way you make that volatility work for you is to only buy them on weakness - never on strength. The sector goes through very orderly periods of down trends and up trends.

Even in ongoing uptrend, oil service stocks can spend many months out of favor. It’s during those times that you want to be a buyer. Oil service stocks are once again starting to come back into favor, and are shaping up for their next offensive move. So do yourself a favor and make sure you profit from it!