My Two "Forward Indicators" for the Energy Sector

by | published October 7th, 2011

The past few days have found Marina and me here in White Sulphur Springs, West Virginia, at the splendid Greenbrier Hotel. This place harkens back to a time of grace and elegance. Few other locations in the country can match its history and charm.

At the moment, it is also the location of The Oxford Club's Fall Regional Meeting.

I always like these get-togethers, because I get the chance to meet with some of my subscribers and hear what is on your minds.

For most of the people I've spoken with over the past few days, I've heard something other than a simple complaint about unstable markets and Greek debt problems. Perceptive investors understand that volatility and rapid price changes – the hallmarks of the current energy sector – cut both ways.

Yes, these news items do increase risk. But that risk also provides significant opportunities to generate profit.

In fact, there is a prevailing attitude of optimism among those congregated here.

Just the past three days have indicated the pendulum is swinging back. And with that change has come an accelerated advance in energy stocks – almost across the board.

After the heavy pressure down over the past two months, a recovery is centering on specific segments of the energy sector. While stocks in that sector are now into a broad-based rise, the primary recovery will reveal itself most strongly in two very specific areas…

So here is the primary message I shall be giving to the assembled here in Greenbrier later today (you, of course, have heard it here first):

The best strategy is to position ourselves to move in advance of the forward curve.

Here's how:

Forward Indicator #1: OFS Companies

Oil field services (OFS) providers have simply been hammered lately.

Just look at global leader Schlumberger Ltd. (NYSE:SLB), Halliburton (NYSE:HAL), Baker Hughes Inc. (NYSE:BHI), or regionally focused companies, like Basic Energy Services Inc. (NYSE:BAS).

While SLB, for example, is up 10.7% over the past three trading sessions going into the open today, it is still 16.8% below where it was a month ago… and more than 30% below its price at the beginning of August.

However, that doesn't change the fact – the first pop in oil and gas gains will always come with OFS providers.

Before the volume comes out of the ground, the exploratory, development, infrastructure, construction, and drilling support must be provided. Better OFS performance always precedes better performance by oil and gas producers.

Keep an eye on these guys.

Forward Indicator #2: Midstream Companies

Second, we have been following an increasing reliance on midstream providers – a subject we have spent some time discussing recently. (See “How to Find Energy Company Value in a Schizophrenic Market,” August 12.)

Oil and gas markets generally must rely on provisions to balance supply with market conditions. And that's especially the case when we're moving out of a declining period (such as the last two months).

These days, it's all about the efficient maintenance of supplies between the fields where they are produced, and the primary refining installations and retail networking – where the end products are actually sold.

This always enhances profitability in the midstream sector.

Here we have the initial gathering of crude, the early processing, the storage, and feeder pipelines (from fields to more central locations), along with other long-distance pipelines, transport facilities (including tankers and shipping), and terminal capacities.

Much of the balance required is actually a matter of determining how much should be released to the general market – and when.

That puts a premium on those services able to store and release.

In addition to underground storage facilities, this now includes a widening percentage of pipeline capacity that is used to store rather than transmit. This is especially the case with natural gas, given the huge surplus reserves capability present in North America.

In some regions, more than 90% of pipeline space is being utilized just for storage.

As we move into the cold winter months ahead, people have to stay warm, and that means there will be increased drawdowns from storage of gas and oil products, such as heating oil and propane. That will put an ever-greater leverage into the hands of primary midstream companies.

Bottom line: Expect the OFS and midstream segments to be the forward indicators of where the energy markets are going as a whole.



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  1. October 7th, 2011 at 14:59 | #1

    Sounds like home. My son was a Chef at the Greenbriar several years ago, wonderful area and quaint little town.

  2. Martha Beals
    October 8th, 2011 at 10:18 | #2

    For awhile now you have stated that Natural Gas will begin to have a more prominent position in the energy world, but it’s price is so depressed right. It doesn’t look like the government will ever do anything to get it moving. What will it take for this abundant and practical energy source to play a more important role?

  3. Ambar
    October 12th, 2011 at 10:53 | #3

    TOTAL AMOUNT TO INVEST: $ 25,000,000.00

    Dear Sirs, Mesdames/Messieurs,

    could you give me your best idea where and on what I can invest the amount of $ 25,000,000.00 in order to gain best ever? Would it be better to invest in commodities as 20% on Gold, 20% on Silver, 20% on Oil, 20% on Food, and 20% on European/North American/Australian Gold Fields? Or should I invest 5% on Gold, 30% on Silver, 25% on Oil, 10% on Food, and 30% on European/North American/Australian Gold Fields?


  4. Kenneth H Goodman
    October 14th, 2011 at 18:43 | #4

    Today,the most exciting investment in the energy field is SDRL.
    P/E and dividend is spectacular.

    Professor Kent should get behind this one……… charge………

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