The Rude Awakening
Baltimore, Maryland
Friday, April 27, 2007 ------------------------- - Confessions of an Iranian energy analyst,
- An inside look at the explosive oil markets,
- The oil war to end all oil wars and plenty more…
------------------------- Eric Fry, reporting from Baltimore, Maryland… In the Monday edition of the Rude Awakening, our resident Renaissance Man and geological expert, Byron King, offered a few kind words for "the oil service trifecta of Baker Hughes (BHI), Halliburton (HAL) and Schlumberger (SLB)." "I find it fascinating and noteworthy that the oil services stocks have begun to diverge from the price of crude oil.," King remarked. "As the nearby chart illustrates, Oil Services stocks are challenging their all-time highs, even though crude oil remains well below its record highs…These companies are where the action is, and where it will be for many years to come." 
Just two days later, Baker Hughes (BHI: NYSE) sparked some euphoric action in the oil services sector by announcing surprisingly strong earnings for the first quarter. Revenues and earnings rose 20% and 10% respectively, to the delight of Wall Street analysts…and investors. The stock has jumped nearly 10% since King's remarks appeared four days ago. Is this the end of the story? "Unlikely," says King. "The company is expecting its North American revenues to grow about 7% this year, and for its international revenues to jump about 20%. And that's just Baker Hughes. Halliburton also reported some very nice earnings this week…There's a lot more upside in this sector." --- 110% Profits Pledge --- "If at least 12 of my recommendations don't gain 100% or more in your first year, we'll refund your entire subscription cost." Steve Sarnoff, Options Hotline Editor.
When my publisher told me they're pledging to give you the opportunity for at least 12 100% winners this year or your money back, I said they were nuts. But then I looked back at my track record… and the tables turned. Check it out for yourself right here. ---------------------------- Cheap Oil: RIP
By Byron King The world is not running out of oil just yet, but it is BEGINNING to run out of oil. The downward slope from "more than-enough" to "barely enough" could produce wrenching macro-economic adjustments for many nations of the world, including the U.S. But this downward slope will also produce innumerable opportunities for oil-focused investors, especially those investors who focus on the oil services sector. Dr. Ali Samsam Bakhtiari of Iran is one of the many leading energy analysts who believe that world oil production "peaked" in 2006. Dr. Bakhtiari believes that the world is now entering a phase of irreversible decline in conventional oil production. Depletion is outstripping new discovery and reserve growth, he asserts, and this trend will continue indefinitely. He believes that the world's daily oil output will fall from its present level of about 85 million barrels of oil per day to about 55 million barrels of oil per day by 2020. That is, there will be a 35% decline in available conventional oil within a mere 13 years from now. If he's right, the world will change profoundly. But declining oil production does not mean "we are running out of oil." Rather, going forward, oil will become increasingly difficult to locate and extract… and it will become increasingly valuable. But 55 million barrels per day is still one heck of a lot of oil, and life on Earth will go on in some form or another, if the nations of the world do not kill each other while fighting over access to petroleum supplies. The point to keep in mind is that from now until long into the future, there will still be oil wells pumping oil from oil fields. Yes, that's right, you have to get the oil out of the ground. And when it comes to developing that oil deposit, you need oil service companies. Oil service companies provide what the name appears to describe -- drilling services, down-hole logging, well completion services and production monitoring. So the oil service companies are not in the business of owning -- or even attempting to claim title to -- the oil in or coming out of the ground. They make their money providing the services and technical support to the producing entity. Oil service companies, therefore, carry almost no geological or political risk. If you own a company that explores for oil, you run the risk of exploration failure. But the oil service company gets paid for performing the services whether the well is a dry hole or not. If you own an oil exploration company, you also run the risk that some hostile or capricious foreign regime will simply steal all or part of your reserves. But if the political climate becomes too burdensome, the oil service company can just pull up stakes, exit the unfriendly locale and watch from the sidelines while the bureaucrats mess things up for a few years. This is a growing problem. Russia, for example, might browbeat Shell Oil Co. into surrendering most of Shell's share in the Sakhalin-2 project. Or the government of Venezuela might seize control of production facilities from he likes of Chevron or Exxon Mobil. But the "new owners" will still require, say, drill bits from Baker Hughes, wireline services from Schlumberger or well completion services from Halliburton. There are many such oil service companies out there, and it almost seems unfair to single out just a few of them, because there are so many good ones. For those of you who want to own an index fund of oil service companies, there are two that I like quite a bit: Oil Services HOLDRs (OIH: AMEX) and the iShares Dow Jones U.S. Oil Equipment Index (IEZ: NYSE). The OIH currently holds18 companies, the top four of which are Baker Hughes (BHI), Transocean (RIG), Schlumberger (SLB) and Halliburton (HAL). Together, these four stocks represent about 40% of the OIH portfolio.
The IEZ index also tracks the performance of the oil equipment and services sector of the U.S. stock market. It includes companies that are suppliers of equipment or services to oil fields and offshore platforms, such as drilling, exploration, engineering, logistics, seismic information services and platform construction. There is a lot of overlap in ownership between these two index funds. But if you want to own one or more of the three biggest and best individual companies in the oil service sector, you have to look long and hard at the larger names that provide oil field services to the industry on a global level. The companies to which I refer are Schlumberger (SLB: NYSE), Baker Hughes (BHI: NYSE) and Halliburton (HAL: NYSE). These three companies are considered by many to be the gold standard of the oil service industry. Do not make the mistake of thinking that just because these firms are part of the oil business that they are somehow old-fashioned, knuckle-dragging industrial behemoths. All three companies are world leaders in oil field technology, and all of them fund aggressive research and development (R&D) programs. They employ thousands of people with advanced technical degrees, and, overall, keep many patent attorneys and patent examiners busy with their thousands of patent filings every year. The oil service sector funds (OIH and IEZ), as well as the specific stocks that I discussed above (SLB, HAL and BHI), have all had significant run-ups in the past two months, as the price of oil recovered from its January lows. Are these stocks "too high to buy" right now? In all candor, this is a close call for me. Since I believe that the world crossed the "peak" of conventional oil production in the summer of 2006, I also believe that the long-term price trend for oil is up, up and up Thus, from a long-term view, all of these oil service stocks are still cheap. But over the short-term, anything goes. So here is my advice: Start nibbling on these stocks now. But be prepared to pounce and buy aggressively on any general market retreat or pullback. As the rush to find and develop the earth's scarce oil reserves intensifies, the oil services companies are the ones whose numbers will be on the "speed dial" of every major oil exploration company in the world. Joel's Note: Byron King is as addicted to the study of oil as the American people are to using it. During his tenure as a geologist, navy fighter pilot and attorney, he has amassed a knowledge base about the energy sector that few rival. So, when there is money to be made in energy, Byron is the man to point you in the right direction. For his latest report, and an inside look at what makes the sector one of the most exciting investment realms, read on here. --- Outstanding Investment Alert --- Urgent Investment Special Coverage: The Full-on Oil War of 2007: Bloody New "Backlash" Set to Rocket Oil Past $150… and Send Gas Soaring to Over $6 per Gallon Fri Apr 27 10:37:22 2007. US/Eastern Read the full bulletin here. | 
