Drilling into Potential of Oil Services, E&P Companies

Volatility continues to be a key factor in the world oil market and the stocks of energy companies. We think the oil market still is at an early-recovery stage and the fundamentals of supply and demand remain solid. In analyzing potential opportunities, we have identified several key factors at play that may affect the Oil & Gas Equipment & Services (Services) and Exploration & Production (E&P) industry segments.

The industry does not have the excess capacity it enjoyed as recently as 20 years ago. A major oil supply shock can’t be met by tapping excess capacity or oil reserves. The U.S. has been the main supplier of new capacity over the last five years, with the growth in shale oil output driving down prices because of the relative ease in bringing that oil online when compared to deepwater oil rigs.

Source: Global Industry Classification Standard (GICS),
September 2018

Iran sanctions, if fully imposed, could take 1.8 million barrels per day (bpd) out of production. The U.S. is able, at best, to make up about 1.5 million bpd. We conservatively estimate that 1 million bpd will be needed to cover global growth in demand. These factors indicate the need for more spending to bring more oil to market — a scenario that can benefit both E&P and Services companies. Supply growth is slowing because of a lack of investment, primarily internationally, based on the cost versus U.S. shale.

Pipelines in the U.S. are getting full. Two new pipelines are under construction and expected to be in service in mid- to late 2019. E&P companies, which supply the pipelines, will need about six months to ramp up drilling activity, which requires the hiring of oil service companies. Capacity will be limited until that time and many producers may not be able to get their oil to market.

Oil prices have taken a winding path during volatile market year