Playing Oil Spike With Equipment Stocks

By Matthew McCall | March 15, 2012 AAA

With oil sitting above the $100 level and the threat of much higher prices later this year a reality, investors need to pay attention. The spike in oil has been driven by two main factors, increasing demand in the emerging markets and supply concerns over unrest in oil-producing regions of the world. (For additional reading, check out A Guide To Investing In Oil Markets.)
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The last oil spike occurred last year with the uprising in Libya and now the attention as turned to the possible Israel-Iran conflict. Libya is not a major player in supplying oil to the rest of the world and an escalation in the Iran situation would have much dire consequences on the price of oil.

From an investment standpoint, I am going to take my focus away from the Middle East and the unrest that has built a premium into the price of oil. I will turn my attention to companies that are in the business of supplying equipment and services to the drillers. The oil and gas equipment and services companies will be critical to the expansion of drilling near the U.S. and in other parts of the world that are not susceptible to the levels of uncertainty that is currently occurring.

Major Players
Core Laboratories (NYSE:CLB), based in the Netherlands, provides services that include production enhancement, reservoir description and reservoir management. As oil and gas companies try to get the most out of each reservoir, a company such as CLB could be extremely helpful. The stock price has reflected the demand for its services as it hit a new all-time high in February. CLB trades with a PEG ratio of 1.35 and pays a minimal dividend of 0.9%.

FMC Technologies (NYSE:FTI) designs and manufactures systems used by oil and gas companies both offshore and onshore, and also runs an energy infrastructure division. After hitting an all-time high in early February, the stock has pulled back to support near the $49 area and is once again looking like a buying opportunity. The PEG ratio is 1.8 and the stock does not pay a dividend.

Oceaneering International (NYSE:OII) provides products and services to the offshore drilling industry, with an emphasis on deepwater drilling. The stock also hit an all-time high in February and has since pulled back about 8% after a two-month rally. The stock will see strong support in the low $50s, where OII would signal a buying opportunity. The PEG is an attractive 1.1 and the dividend yield is 1.1%.

Helix Energy Solutions (NYSE:HLX) is an offshore energy company that provides reservoir development services to the oil and gas industry. The stock is well off its all-time high set in 2007 and the chart is not as attractive as the first three stocks. However, the technicals have been improving and with a PEG ratio of 0.9, the stock is also attractive fundamentally. A buy in the mid-teens would offer the best reward-to-risk setup.

The Bottom Line
The number one factor that will drive the prices of the service and equipment stocks higher will be more drilling both offshore and onshore; the catalyst for that will most likely be higher oil prices. This is why I look at the sector as a secondary play on rising energy prices around the world. The risk is that the economy slows and demand for oil wanes. This scenario would be devastating to the sector. (For more, see Earning Forecasts: A Primer.)

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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