Oil companies are mothballing oil rigs at a fast clip. Housing prices in certain areas of North Dakota and Texas are declining. Oil rig and oil services workers are being laid off by the thousands. Oil exploration companies are announcing drastic reductions in capital expenditures. The American Petroleum Institute recently announced that the United States oil supply is at an 80-year high. Let me repeat that-80-year high! Europe is in deflation. Japan is finally showing signs of economic life after being flat on its back for several quarters. China’s fabled GDP growth rate is showing signs of unprecedented weakness. Given all these factors, is it any surprise that investors are dumping oil stocks? Can you really fault them with avoiding oil and oil services stocks like the plague?
Well, as the old saying goes: buy on bad news, sell on good news. With this battle-tested investment advice in mind, now might just be the time to load up on oil stocks. Keep the following in mind.
Fact #1: Industry downturns bring consolidations
Whenever an industry faces a prolonged downturn, company consolidations are predictable. Why? They make all the sense in the world! Solid companies would buy out competitors to boost their market share. Best of all, they are buying out their competition at bargain pricing. The acquiring companies can’t even think of doing such buyouts when times are good-such deals would simply be too expensive to pull off! This is precisely what’s happening in the oil services oil industry segment.
The #2 global oil services player, Halliburton is buying out giant competitor Baker Hughes. This means the highly lucrative multi-billion dollar global oil services industry will now be reduced to 2 giant competitors and many smaller competitors. Once the Baker Hughes deal is concluded, Halliburton’s only remaining gargantuan competitor will be Schlumberger. Not a bad move. Halliburton would have had a tough time gobbling up Baker Hughes (and its market share) if oil was still trading well above $100 per barrel. There wouldn’t enough incentive for Baker Hughes to sell out. The buyout would have been more expensive.
All told, Halliburton’s buyout of Baker Hughes will make it a better positioned company. Should the oil industry recover from its current slump, Halliburton stock is poised to appreciate quite well.
Fact #2: Best of breed industry stocks are still depressed
While it’s a bad idea to simply scoop up any and all oil stocks that are currently depressed, solid players like Halliburton are great picks. How do you pick? First, the company must have solid market share. Also, it must be well-capitalized and a giant in its field. Despite all these advantages, the stock is down because its industry is down. Best of breed industry stock picks like Halliburton are quite plenty in today’s depressed oil market environment. Besides Halliburton, look at oil extractors, oil rig manufacturers, oil transporters, so on down the line. The key is to look at the many different segments of the market and pick the biggest companies with the biggest market share and lowest debt load.
Far from being scared by the oil industry’s current slump, investors should be excited about picking up great companies at bargain basement prices.