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Originally Posted by PitBullFan
I read what you wrote but I was a little confused on whether or not you were talking about oil extraction or refinery processing. From what I understand is that the prices are up because of refinery problems, not necessarily the output from drilling. Am I understanding this correctly?
I own Shell and BP stocks, both have been great performers over the last 5 years. Nothing will last forever though and I have been thinking about making a spec play and getting out after this weinter heating season. I have not investigated the energy sector that much since I got into Oil.
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Great holdings, kudos on that PB. Sorry for the confusion on my point above; I'll try to explain it better:
Maintaining the present level of production is necessary to continue the price of gas at present levels. If production slows because there's a shortage of production and barrels of crude coming out of the ground, the price of gas around the world will balloon because each barrel will be worth more because of demand.
Enter - exploration and drilling services. These are companies that are and will increasingly be tapped to explore, drill and export the oil to the refining companies or the Big Oils. From there, the refineries will make money on margins, so the price for a purely refining company isn't so much of an issue. For the likes of Schlumberger and Conocophillips, they will only see their business, contracts and demand for their labor increase ten-fold going forward. As the price of oil goes up, their labor will be more important and they can charge more for their service.
I hope that helps.
None of this is to say that the majors like BP, RDS or Exxon are not buys. They will all make massive windfall profit and they pay nice divs, which will only grow as their cash reserves grown. However, they have to incorporate every aspect of how production, price and margins mesh together and that can make them less of a growth story than the services or refiners. They do their own refining...etc but they naturally have to tap other companies for specialized service too.
I love Schlumberger and Conocophillips going forward. 3% of the Berkshire Hathaway portfolio is invested in Conocophillips, which is not only best-in-breed in that sector, but it's also undervalued when considering its PEG ratio which is around or under 1 right now. Around or under 1 means that the company is comparatively cheap compared to it's currect earnings and it's year over year growth in earnings.
