Upstream Oil Investments Could Unlock Strong Long Term Value

The month of October is National Energy Awareness Month, and amid the precursory anticipation of trick or treat customs, this month offers a chance to consider some worthwhile investment opportunities in this sector.

Access to oil and natural gas resources from both offshore drilling and land-based rigs will continue to play a critical role in supplying energy requirements, particularly within the context of the transportation industry.  Currently, oil supplies more than 40 percent of total energy demands and represents more than 99 percent of the fuel consumed in North American cars and trucks.

The Department of Energy (DOE) has created an Office of Fossil Energy focusing on two important concerns over oil – an immediate readiness to respond to oil supply disruptions and keeping oil fields producing in the future.  Technological improvements will be required to enable more efficient use of these resources and increased utilization rates.  The DOE’s Fossil Energy program is endeavoring to work with companies to develop new exploration, drilling and production processes that should underscore positive long term secular growth investments.

Many investors will be looking for direct exposure to exploration and development companies; however, one option for investors who like the idea of participating in the long term growth of the industry but not the inherent risk of a specific exploration or development company is to consider oil and gas service companies. Drilling firms are highly dependent on the price and demand for petroleum. These companies are some of the first to feel the effects of increased or decreased spending. If oil prices rise, it takes time for petroleum companies to size up land, setup rigs, extract the oil, transport it and refine it before the oil company sees any profit. On the other hand, oil services and drilling companies are the first on the scene when companies decide to start exploring.

Investment Considerations

Mullen Group (TSX:MTL) owns 26 independently-operated businesses operating in two broad segments. The Oilfield Services segment provides specialized services to the oil and gas industry, including hauling drilling rigs, oilfield liquids and other equipment needed by oil and gas drillers. Mullen’s trucking/ logistics segment provides general and specialized freight services in North America.  The company is the market leader in a number of these niche businesses where long term relationships with customers and economies of scale create economic moats which can impede potential competitors. Mullen’s market leadership and corporate strategy of acquiring complementary businesses during the weak points of the economic cycle has resulted in Mullen’s superior performance through past cycles and should make Mullen an even stronger company when the economy recovers.

Pason Systems Inc. (TSX:PSI) manufactures and rents equipment used on land based oil and gas drilling rigs to collect, communicate and analyze drilling activity. It is the industry leader, with a presence on 95 percent of Canadian rigs and, over 60 percent of United States rigs.  Pason’s dominant market share in Canada and leading – and quickly growing – share in the U.S. has resulted in 25 percent annualized earnings growth over the past 10 years. Pason’s entrenched position on drilling rigs should allow it to increase its daily rental revenue by selling add-on products and raising rental prices. Customer service is a key competitive advantage. Its market position allows Pason to hire more local field technicians to provide more timely service to its customers.

Oil Prices Climbing

A weaker dollar has generated capital flows into oil and other commodities as investors reconcile the growing prospects for continued quantitative easing, which is considered to improve oil demand in the U.S., as it is currently the world’s biggest energy-consuming country. Crude oil hit a new five-month high on Wednesday as a larger-than-expected drawdown in U.S. gasoline stockpiles and a sinking dollar prompted investors to bid up energy futures.  U.S. crude for November delivery rose 45 cents to $83.27 a barrel by, up for the fifth day in six. Data from the Energy Information Administration (EIA) showed gasoline inventories fell 2.65 million barrels last week, while distillate stocks, which include heating oil and diesel fuel, dropped by 1.12 million barrels. Crude stocks rose 3.1 million barrels, 10 times more than expected.