I’m starting to feel I should be interested in oil stocks again. That’s mostly because I think that we’ve already seen the lows for the oil price earlier in this year, when quotes were flirting with $25 a barrel. I continue to think that crude will trade in a range between $40 and $60.
Under normal circumstances, I’d figure that the big multinational integrated oils would be the safest bet and that one could add some oilfield services shares to provide speculative upside potential.
For today, however, I don’t think the traditional formula is right. Instead, I think the main thing to come to grips with is the technological change that hydraulic fracturing has brought to the industry. I think this is similar to what happened in the steel industry when mini-mills began to compete with blast furnaces …or to semiconductor manufacturing when third-party fabrication plants opened in Taiwan, enabling the separation of thought-intensive design from capital-intensive plant ownership …or to the computer industry when the minicomputer and the PC replaced the mainframe.
If I’m right about this, then anything that has to do with the older order is out. This means multi-year mega projects in remote or hostile environments (physically or politically) are substantially more risky than they have been. It also means that the builders of giant offshore drilling equipment to find, lift or transport this kind of output aren’t coming back any time soon. Nor are the service companies that own this sort of equipment and specialize in this kind of drilling.
The Big Oil majors, who have been the leading proponents of exotic mega projects, must also come into question, as well. How quickly can/will they mentally adjust to a new era of abundant oil rather than perpetual shortage? What will they do about projects that are now under way?
What other industries undergoing radical transformation have shown in the past is that the incumbents take a surprisingly long time to adjust to the new circumstances. If that proves true again, then the best way to make money will be to undertake the tedious task of examining smaller fracking-related drillers and service companies to see how they will benefit.
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Thanks for sharing!