The takeaway is that supply is falling and demand is rising. That math equals higher prices. And while we haven’t seen demand kick in yet, oil prices are already over $80 per barrel. That suggests a $100 price target is reasonable as demand rises.
For investors, that means there’s a huge opportunity in oil companies today.
Here’s How to Play the Surge to $100 Oil
The smart way to play rising oil prices is through the three main parts of the oil industry: oil service, exploration/production (E&P), and midstream. Each of these sub-sectors has value today. However, each one brings its own risks too.
We can use a simple real estate comparison to understand the oil industry. E&P companies are the developers — they figure out where to put the houses and they design the subdivision. The service companies are the builders. They swing the hammers and dig the ditches to make the houses. Midstream companies build the roads and run the pipes and electricity to the development.
If there’s a housing boom, we want to own the whole sector. The same goes with oil. Each of those groups adds value and profits from rising oil prices. Right now, we can get both stock price upside and lock in excellent dividend yields in some of these companies.
That makes the oil industry doubly attractive right now.
Oil Service Companies
There are many of these companies that make up the “picks and shovels” of the oil industry. Most of them are either drilling companies, specialty services companies, or engineering companies. However, there are three that stand out: Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL), and Baker Hughes (NYSE: BKR).
All three companies are strong operators that will continue to play a key role in the oil industry both in the U.S. and abroad.
A quick review of their fundamentals shows that each company has a strength and a weakness. For example, while Baker Hughes has almost no debt, at just $3.5 billion, it only generates about 2% free cash flow per quarter from revenue. The other two carry much more debt but generate much more free cash flow. Baker Hughes and Schlumberger also pay a 3% and 2% dividend yield, respectively. Halliburton pays less than 1%.