After 2 Years of Pain, Here's Evidence of an Oil Rebound

Last week, the Energy Information Agency reported that 55% of last year's newly installed capacity was from green power.

On this edition of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk about what this means for energy going forward, and how investors might want to get in on what looks like an unstoppable wave toward green power.

Also, the pair talk about how OPEC's follow-through on their production cut could either bring oil out of the rut it's been in for the past few years, or drop the bottom right back down again; why and how oil-services companies such as Schlumberger (SLB -0.89%) and Halliburton (HAL 0.34%) are demanding more money; and more.

A full transcript follows the video.

This podcast was recorded on Oct. 27, 2016.

Sean O'Reilly: This Motley Fool podcast is brought to you by Criquet. Criquet makes perfect, classic, and easy-going polo shirts. For 20% off your first purchase, go to criquetshirts.com/fool and use the promo code FOOL. 

Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. Today is Thursday, Oct. 27, 2016, so we're talking about energy, materials, and industrials. I am Sean O'Reilly, and I am joined in studio by the incomparable, the insightful, The Motley Fool's own Mr. Taylor Muckerman. How's it going, Taylor?

Taylor Muckerman: The introductions just keep getting better, my friend.

O'Reilly: Thank you very much. I reflected that I wasn't giving my all, and I thought, I'm going to build up Muckerman.

Muckerman: I appreciate that. You're pretty swell, too.

O'Reilly: Thanks. I'm blushing.

Muckerman: I can see that. And so can our audience, thanks to our camera crew.

O'Reilly: Yeah! It was a struggle, but we got video. Yay! So today we're talking about oil service companies demanding more money for the first time in two years, and green energy continuing to surpass installation expectations on a global basis. But first, we have to check in on how OPEC is doing over there with their supposed cut negotiations.

Muckerman: Yeah, they said they were going to cut about 4%. That's what they told Russia, trying to get them on board. But then Iraq was like, "We don't really feel like we should comply."

O'Reilly: Yeah. They said, "We have a civil war going on," which has kind of been the story for a while. What do you think about that? They're basically saying, "No, we really need this money to fight these people."

Muckerman: Yeah, they're fighting ISIS. They have that war going on. They compare themselves to Iran and Nigeria. They are granted amnesty from these cuts because civil war and sanctions have been impacting their ability to produce oil for the last several years, at least. So Iraq is trying to put itself in that same boat and say, "You know, we've been dealing with this, we need the funding from oil, and we're finally really ramping up again, so we're not going to cut." But they said they will go to the meeting, and they will address this cordially, but kind of an opening shot across the bow before the meeting even begins.

O'Reilly: I'm interested to see what happens, and then we're going to move on. It's going to be interesting, because it's going to be, how badly does Saudi Arabia want to do this cut? Because they're obviously going to pick up a lot of the slack.

Muckerman: Yeah, they're the biggest producers.

O'Reilly: I do wonder if they pull Iraq to the side and be like, "Hey, we'll write you a $50 billion check if you cut."

Muckerman: It would definitely help support oil markets if they did cut. I would imagine, if they don't agree to this after suggesting it earlier this month --

O'Reilly: And teasing all of us for months.

Muckerman: Yeah, the oil markets probably have the idea of the cut baked in, so that if they don't cut, prices could fall out again.

O'Reilly: It will not be pretty.

Muckerman: Well, you would imagine it would be. Can't make any promise. But you would imagine that if OPEC backs out from another agreement, people would just stop taking them seriously altogether.

O'Reilly: Speaking of seriousness, I take this gentleman very seriously. Battle brewing in the oil-services sector. As we mentioned, oil may or may not be on the cusp of a modest rebound. After two years of taking a shellacking, Paal Kibsgaard, the CEO of Schlumberger, told investors on Friday that going forward, his firm will only engage -- "only" being the operative word there -- in work that is profitable. They just reported an 82% drop in third-quarter profits. Halliburton made, what, $6 million --

Muckerman: Yeah, but their first net revenue increase in seven quarters for Halliburton. So they're actually doing a little bit better, because they have more exposure to North America, where you've seen an uptick in activity, versus internationally, where Halliburton doesn't really expect an international rebound until earlier next year.

O'Reilly: What was your first reaction when you heard this?

Muckerman: My first reaction was, it had to happen sometime. They gave tremendous pricing concessions to customers. Halliburton even went so far as to open up a new business arm to help finance some of their customers' activity. So they're loaning money so that the company can pay it right back to them for the services with interest.

And then, Schlumberger was also granting concessions in terms of payment-due dates. They're going to start clamping down on that again. Halliburton said, "We're going to start focusing more on returns and asset utilization than margins and revenue growth," which comes as a little bit of a surprise, because you traditionally think, public companies, revenue growth, margins is all the rage. But they're going to focus more on returns, like you mentioned, taking projects that are profitable and trying to negotiate prices somewhat closer to what they were before November of 2014. But Schlumberger's CEO did, quote-unquote, "confirm we have reached the bottom of the cycle."

O'Reilly: Do you believe him?

Muckerman: I don't know how long the bottom's going to be here, but it seems like, potentially, that could be the case, because you did see an uptick in rig activity in the U.S. Granted, Halliburton says that seems to be smaller companies with less capital-intensive projects bringing these rigs on. You're not seeing people start to drill humongous laterals and multi-stage fracking again. But you are seeing activity come back. 

O'Reilly: Rig count has been ticking up a little bit.

Muckerman: Rig count is up; I think it was double digits this last week or month. That's been consecutive weeks for the last couple months, where you've seen rigs being added. But if they're not being added to very capital-intensive projects, then that's not the profitability that Halliburton and Schlumberger are looking for. Halliburton is saying that they have the strongest North American market share that they've ever had, they believe, as a company. 

O'Reilly: Well, if your competition is going bankrupt ... 

Muckerman: Yeah, this is true. But hey, that's what happens when you the biggest dog in the market.

O'Reilly: Last man standing, yeah. Sorry to interrupt, but I'm super interested to see what Robert Workman, CEO of DistributionNOW (DNOW -2.51%), says when they report on Nov. 2. They distribute all the parts for these rigs. They have, like, 300,000 individual nuts and bolts and tools and all this stuff.

Muckerman: Yeah, trying to standardize everything.

O'Reilly: When Tyler Crowe and I went down to Houston a little over a year ago, and we sat down with him and a couple other oil CEOs, Workman told me, when the rebound happens, they will be the first to know. Because when you have a rig that's been sitting idle for a few years and it's been rusting, I mean, things happen to these rigs as they age --

Muckerman: It's like your body -- if you don't use it, you lose it. If they stack these rigs, yeah, they're going to have a much shorter shelf life. Which is kind of surprising. You think, you let something idle, you can kick it back up and it'll have the same lifespan. But no, that's not the case. And they're stripping them off and using those parts to replace parts on rigs in circulation. So, yeah, they're running the inventory dangerously low.

O'Reilly: Yeah, Nov. 2 will be very interesting. 

Muckerman: I agree. Different perspective. It's one step closer to the bottom of the vertical, because the parts are first and then the machines and the activity are second.

O'Reilly: Eventually new orders -- really quick, before we move on, if you're an investor in Schlumberger or Halliburton, how should you be taking this? This is good, right? They're demanding more money.

Muckerman: Yeah, they're demanding more money, they see that the cycle is either bottomed or very near the bottom. At least, internationally, near the bottom. North American specifically, Halliburton says it's in, we're already seeing an increase. So, yeah, I think you feel good about it, being invested in these companies. I'm a Halliburton shareholder, I feel good. I wish I added more in the last year or so, but I didn't. But that's still top of mind. Maybe OPEC doesn't agree to a cut, and we get another opportunity, which I plan not to miss, if that's the case. I think you have to feel good about being a shareholder of these companies, and generally looking at the energy market, I'm positive on it, absolutely.

O'Reilly: Before we move on to discussing the rapid increase in green energy installations, I want to give a shout out to our friends at criquetshirts.com. Criquet makes comfortable, sharp-looking polo shirts that perfectly mix old-school style and modern design. Criquet shirts are made with super-soft, 100% certified organic cotton, making their shirts as comfortable at the 19th hole as they are on the 18th. The fit is not too baggy and not too skinny. Criquet shirts come with removable collar stays to help keep your collar looking crisp and new, which means no more bacon collar, which of course means an end to wrinkled, rippled, and limp collars -- the bane of every man's existence.

Muckerman: Bacon collars. That's new.

O'Reilly: You knew exactly what it is, though.

Muckerman: Yeah. And they're just using bacon because everyone loves bacon these days. It's all the rage. Memes galore.

O'Reilly: They also offer free, no-hassle returns and exchanges. As it happens, I'm wearing one right now, and I can personally attest that the fabric feels great and the shirt itself has found a special place of honor in my closet.

Muckerman: Irish green.

O'Reilly: I picked the color, too. As a special offer to our listeners, you can get 20% off your first purchase by going to criquetshirts.com/fool and using the promo code FOOL. Thanks again to Criquet Shirts for supporting our show.

Muckerman: Out of the studio, we have Mark Reeth wearing his Criquet shirt as well.

O'Reilly: Looking good!

Muckerman: Different color, navy or black. Navy? Black? Navy, yeah, thumbs up for navy.

O'Reilly: Who wore it better?

Muckerman: It's tough to tell. He's behind the glass, so there's some reflection. It's a tough competition.

O'Reilly: We love you, Mark. Mr. Muckerman, next we have, according to the Energy Information Agency, renewable energy reached an important turning point last year with record new installations for emission-free power. The phrase that immediately entered my mind was "escape velocity." It seems to have hit what it needs to hit to keep this trend going.

Muckerman: What did it say, 55% of newly installed capacity last year was from green power globally? Yeah, I think that pretty much signals that it's of age. More than half. And total installed capacity exceeded coal for the first time ever. That wasn't additions, that's just globally, power being produced green versus globally power being produced by coal -- green wins.

O'Reilly: I also couldn't help but notice that they had a lovely chart in the EIA release. If you would like us to send you this link, or you can Google it --

Muckerman: We can tweet it out.

O'Reilly: That's a good idea!

Muckerman: @IndustryFocus and @TMFEnergy.

O'Reilly: What is it, social ... media?

Muckerman: Something like that.

O'Reilly: Yeah, that's a good idea, Taylor.

Muckerman: Yeah, why not?

O'Reilly: They had that chart. The U.S. needs to play catch-up. We're trailing installations in countries like China.

Muckerman: China, "the undisputed global leader," according to Bloomberg, who published an article about this exact topic, expected to account for 40% of growth going forward.

O'Reilly: Wow!

Muckerman: I mean, it's a big country, right?

O'Reilly: It is, but it's not 40% of the global population, ergo ... that's a big chunk.

Muckerman: They're spending a lot of money over there.

O'Reilly: Did you happen to catch what types of power they were installing? I know they're big into hydro.

Muckerman: They have big hydro production in the south along the borders, India and other countries down there. I would imagine there's some solar to be had. What's the big desert in China? Not the Gobi ...

O'Reilly: Mongolian?

Muckerman: I don't know.

O'Reilly: For all our old geography teachers listening, we're sorry. China, U.S., and India seem leading the growth. Really quick, you're an investor -- what are you thinking right now?

Muckerman: I'm thinking there still aren't a whole heck of a lot of opportunities to invest in solar, hydro ...

O'Reilly: Manufacturers are going bankrupt left and right.

Muckerman: Yeah, it's still very early stage in terms of who the winners of this long-term trend are going to be. SolarCity is about to be off the market, supposedly. But then you have companies like Ormat Technologies, which is geothermal, which is green. That's a company that I've been following for quite some time' they've done very well. Global geothermal installer and utility operator. Outside of that, you mentioned solar-panel producers, that's just a race to the bottom --

O'Reilly: You have SunPower.

Muckerman: Yeah, but even then, there's some struggles going on.

O'Reilly: For sure. Total, of course, has a large stake, so that's good.

Muckerman: Yeah, they have some good financial backing, and probably access to cheap capital, even if rates decide to rise because of that backing by Total. But just to list a few, yeah, SunPower, First Solar, Canadian Solar is a panel manufacturer. Clean Energy Fuels, but that's more natural gas fueling, not necessarily green energy, but cleaner energy. There's options out there.

O'Reilly: Bottom line, it does seem like, this is super interesting, obviously impactful for mankind, but investors should watch?

Muckerman: Keep an eye on it, for sure. But it took this long for it to account for 55% of total installations --

O'Reilly: New installations per year.

Muckerman: Yeah. There's still a lot of legs left here.

O'Reilly: Taylor, before we head out, any cool stock picks, thoughts? Anything interesting going on? We covered a lot today.

Muckerman: We did. And because of that, I don't have a stock.

O'Reilly: Schlumberger?

Muckerman: Fine. Schlumberger, I'll go with that.

O'Reilly: Shamelessly plug your portfolio.

Muckerman: No, I don't own Schlumberger. But one note that I found very interesting was, their revenue declined 2% in the quarter year over year, and they blamed it on Cameron, their big-money acquisition from six months ago, stating "the declining backlog." So I instantly started to scratch my head.

O'Reilly: That sounds like an excuse.

Muckerman: Well, it's a pretty terrible excuse, if you just spent $7 billion on this company, and their backlog is declining six months into the deal! But they are saving money through synergy, so there's that.

O'Reilly: If they say so.

Muckerman: Yeah. But they did have some positive things to say about projects that Cameron is working on with their one subsidy. But if you listen to these companies, deepwater is still in a whole heck of a lot of trouble, and that's a primary focus for Cameron.

O'Reilly: It's because of the movie.

Muckerman: Yeah. Blame it solely on ... what was the name of it?

O'Reilly: Deepwater Horizon.

Muckerman: Oh, it was named after the ...

O'Reilly: Yeah, inspirational. All right, well, as always, thanks for your thoughts.

Muckerman: Thank you, Sean.

O'Reilly: Have a good one.

Muckerman: You, too.

O'Reilly: That's it for us, folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. Once again, that's [email protected]. As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening, and Fool on!