The Companies That Are Already Benefitting from Increased Drilling Activity Post-OPEC Cut

January marks the first month of OPEC's production cut, and the oil industry is already responding.

In this week's episode of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman go over this week's biggest energy, materials, and industrials news. Find out how OPEC's production cut is coming along so far, and where it's likely to go from here; how the cut has indirectly affected American energy companies so far; why last year had the lowest recorded carbon emissions since 1992; a few ways investors might want to invest in the rapidly growing and evolving solar power industry; and more.

A full transcript follows the video.

This podcast was recorded on Jan. 5, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, Jan. 5, 2017, so we're talking about energy, materials, and industrials. I'm joined in studio by the irreplaceable Taylor Muckerman. Happy New Year, Taylor!

Taylor Muckerman: Fireworks are still going off in the studio.

O'Reilly: Yeah. You know it's a fire hazard, right? You can't do that.

Muckerman: Oh, really? Shoot.

O'Reilly: Yeah.

Muckerman: I didn't get fired yet for it. We'll change it to sparklers instead.

O'Reilly: Is that a fire hazard, Austin? Sparklers?

Muckerman: Nah.

O'Reilly: He's shaking his head yes. That's bad. Our producer, Austin, does not approve of sparklers. Why do you have to be like that? It's Happy New Year, man, come on. He's just sitting over there with ...

Austin Morgan: I don't want you guys burning down my studio.

O'Reilly: Nice, OK. Doesn't he have a great radio voice, folks?

Muckerman: Yeah, I think we should just give up.

O'Reilly: Can you just come in here and do this and I'll just get some coffee?

Morgan: I'll just take over.

O'Reilly: Attaboy. You talk about hockey. 

Muckerman: Well, what are we talking about? If he's talking about hockey, what are we up for today?

O'Reilly: Thanks for that transition, Taylor! Look at this guy. 

Muckerman: Little two-arm pass there.

O'Reilly: Really quickly, I just want to mention OPEC, because it's what we do.

Muckerman: Yeah. We're going to try and trim that down unless there's something major. But, new year, I feel like we have to at least briefly hit on it.

O'Reilly: Well, this is the first month they're supposedly going to do the production cuts they agreed to.

Muckerman: Yeah, they start the cuts. Up to 1.8 million barrels a day, including the 11 other countries that committed to --

O'Reilly: Right. The big story a couple weeks ago was that Mexico was in on it, and blah blah blah.

Muckerman: And Russia, yeah.

O'Reilly: I actually just saw on the wires this morning that Iraq has already cut production. They're actually doing it.

Muckerman: Yeah, they're cutting medium and heavy crude, which is basically what everybody produces over there.

O'Reilly: I'm mildly impressed with how everybody is actually doing what they said they would do.

Muckerman: Well, we don't know the degree to the extent that they have cut. But yeah, they have started to cut, along with Oman and Kuwait as well. There's at least three out of the OPEC members.

O'Reilly: We're 10% there, yay. 

Muckerman: Yeah. We don't know much about the other countries. Mexico wasn't necessarily cutting; they were just expecting a natural decline of oil wells, without having the replacement there. But of those 11, all eyes are on Russia, who hasn't begun to cut or provided any guidance of when they might decide to.

O'Reilly: I get the distinct impression that Russia views the world as being on a need-to-know basis.

Muckerman: Yeah. I think maybe they're waiting to see what happens when everyone else cuts, and if prices rise, they're probably going to be like, "Well, you know what? Thanks, guys!"

O'Reilly: Well, you know that Saudi Arabia already increased their prices -- you know how they set monthly prices to Asia and the U.S. and stuff. They already upped it a little bit because of the cut. They're like, "We cut production, so we're upping the price."

Muckerman: Yeah, upping prices. But we mentioned this a couple weeks ago, straight from the mouth of the former Saudi Arabian oil minister talking about OPEC and their previous cuts, saying, "We tend to cheat." So, we'll be surprised to see 100% of that 1.8 million barrels per day cut. Analysts I've seen, a Goldman Sachs analyst says he believes around 84% of that total will be achieved. I've seen as low as 70%.

O'Reilly: Well, before the holiday, you said "historically." You said, you usually get about two-thirds? Over the last 40 years or whatever.

Muckerman: Yeah, I think it falls right in that 60%-75% range.

O'Reilly: If we got 83%, that'd be a win.

Muckerman: Yeah, historically, it would be a win.

O'Reilly: Good for them. Moving on, very briefly, to our likely next Secretary of State under the Donald Trump presidential administration --

Muckerman: Still to be confirmed, but moving in that direction.

O'Reilly: Likely.

Muckerman: Likely. No one else has been named, not even close.

O'Reilly: Plus he's a really good negotiator. I didn't know he had this much money, but I guess I should have assumed.

Muckerman: Yeah, he's been there since he started his career.

O'Reilly: So he's handing over control of $250 million worth of ExxonMobil shares, and his net worth is like $400 million. Cool.

Muckerman: Yeah, he's disclosed about $400 million in assets. That includes pension and stock he owned and the $180 million payout he's set to receive simply for becoming the Secretary of State.

O'Reilly: It's good to be the king.

Muckerman: Yeah, not too shabby. But on top of that, he has holdings in several other oil companies, producers, service companies. You're looking at Royal Dutch Shell, Chevron, Schlumberger (SLB -1.17%), [General Electric]. Didn't necessarily disclose the full value of those. But yeah, guys, he's an energy man, quite clearly.

O'Reilly: With a name like Rex Tillerson, how could it be otherwise?

Muckerman: Yeah, that's wildcatter through and through.

O'Reilly: You name a kid that because you think he's going to be an oil man.

Muckerman: Yeah. It's like having a kid you want to be a wrestler and never letting him lay down on his back. That's basically what happens when you name your kid Rex Tillerson.

O'Reilly: Boom. Moving on to the oil market, the OPEC cut is actually having its desired effect, at least for the price of oil. But that, of course, has side effects, like the increased drilling activity here domestically in the United States. Going to happen. Saudi knew it. It is what it is. 

Muckerman: It's already happening. We saw production pick up later in the year of 2016. You'd imagine it will.

O'Reilly: And refresh my memory, I think U.S. production dropped about a million barrels? We were at about 9.6 million and it dropped to 8.6 million?

Muckerman: Something like that, yeah.

O'Reilly: But Halliburton (HAL -1.04%) is hiring 200 workers in, unsurprisingly, the Permian Basin. I think you sent me this article?

Muckerman: Yeah. That's the hotness.

O'Reilly: They laid off a ton of people, though.

Muckerman: Yeah. Last year, if you looked at the announced layoffs --

O'Reilly: Thousands. Tens of thousands.

Muckerman: -- energy services companies were the worst by far. Schlumberger had two of the top five largest announced layoffs last year, and Halliburton was also right up there. So yeah, I don't know if here's our new jobs, but either they're shifting 200 to the Permian, or they're announcing actually hiring 200 new folks.

O'Reilly: I wasn't particularly impressed with this. One, it's like, 200 guys. Who are we kidding? Hundreds of thousands of people have lost their jobs. Two, it's in the Permian. Not surprising at all, either. The other headline we were talking about before we came in here was drillers capping their record year for stock sales with a huge bump in December, which is, again, not surprising because OPEC gave the oil industry a wonderful Thanksgiving present.

Muckerman: Yes, they did.

O'Reilly: This seems like a slightly bigger deal.

Muckerman: Yes. You're looking at these companies going out there. Mostly, these are small to mid-sized companies. You're not seeing big equity raises from the integrated, or anything like [EOG Resources] or [Pioneer Energy Services].

O'Reilly: Plus, they don't need the cash, but they have a little bit of an opening, and they need to raise money.

Muckerman: Yeah. So you have [Diamondback Energy] raising money to purchase assets in West Texas. Gulfport Energy raised some money to buy assets in Oklahoma. There are a few other companies out there as well. You look at a record year for issuances by oil and gas producers: $31.3 billion in 2016, which is twice as much as you saw in 2015.

O'Reilly: That is amazing. What was it in 2014?

Muckerman: 2014, not off the top of my head.

O'Reilly: Still, that's crazy.

Muckerman: Yeah. Just in December alone, they raised about --

O'Reilly: And this was equity, not debt.

Muckerman: Yeah, this was all equity.

O'Reilly: That is staggering to me.

Muckerman: Some were paying down debt, but most of them, I think, are just gearing up, not necessarily to immediately drill, but they think it's about time, so they're padding the wall here.

O'Reilly: Yeah, that does seem to be in effect.

Muckerman: And it might prove prescient, because right now, you're looking at expectations that the cost of drilling and fracking is going to rise about 20% this year, simply because companies like Halliburton and Schlumberger and Baker Hughes and [Weatherford International], the services companies, gave pricing concessions over the last couple years to help these drillers maintain a low cost per barrel to produce, so that they could actually do some drilling. They're probably going to try and claw that back. On top of that, higher demand in general, the services are going to be stretched because of the layoffs that we talked about. So you're looking at, maybe, up to a 20% increase in the price of fracking, which could add up to $10 per barrel to the base cost.

O'Reilly: Yeah. Was that a month ago that you first mentioned that? We've talked about it before.

Muckerman: I've had it in my mind for a little while. Yeah, those price concessions were pretty serious.

O'Reilly: They've been nice, but now they want to make money, too.

Muckerman: Absolutely. And these producers, they can't acquire the oil and natural gas without these companies. So they're the bottleneck, and if they don't get the prices they want, you know what?

O'Reilly: Game over. So, Mr. Muckerman...

Muckerman: What?

O'Reilly: We're going to go from guys getting oil out of the ground to the next stage of what might be how the world is powered with energy. Carbon emissions for 2016, we just found out, are expected to be the lowest since 1992. What were you doing in 1992, Taylor?

Muckerman: Well, let's see. I was 7.

O'Reilly: You were playing Power Rangers.

Muckerman: Probably playing outside and harnessing the power of the sun myself. Vitamin D.

O'Reilly: I have to think that a lot of this is just because of way more efficient cars.

Muckerman: Efficient cars, yeah, that's big. The switch from coal to natural gas to generate power in the United States. We saw, this year, for the first time ever, natural gas overtook coal as the largest provider of fuel to create electricity. So that's a big thing. And I think people drove a lot more this year because gas is so cheap. I don't have the exact specifics on me.

O'Reilly: There were statistics. It's a calculation, like, do we fly or drive? Especially if you have a family of four, it's very price-dependent. And gas was cheap.

Muckerman: When you start keeping Volkswagen honest, you get down to the bottom of it, and you take all those older cars off the street that were polluting more than we thought --

O'Reilly: Wait, are you implying that Volkswagen is the reason for this drop? 

Muckerman: Quite possibly. Maybe they should be lauded now instead of...

O'Reilly: There were a lot of Volkswagen Jettas included in this, now that you mention that.

Muckerman: Yeah, millions! Globally. I don't know about how many were impacted in the U.S. But yeah. Big deal.

O'Reilly: Also a part of it might be -- and we talked about this before -- but solar power is on the rise in Texas in 2016. That's, of course, the other part of this. Also, I don't know if you saw, fool.com writer Travis Hoium, he recently wrote a piece about how Las Vegas is entirely green now for their energy.

Muckerman: No kidding?

O'Reilly: Yeah. They're in a desert, so it's like, what are you going to do?

Muckerman: So that hockey stadium is going to be completely solar powered?

O'Reilly: Yeah. Isn't that nice? But, same deal in Texas. Desert land, nothing grows, let's put up some solar panels.

Muckerman: They're catching up to California and Nevada in terms of solar installations. I think this was the strongest year ever for them.

O'Reilly: It's also fun for them, because there's three power grids nationally in the United States. There's the Eastern grid, the Western grid, and Texas.

Muckerman: I had no idea.

O'Reilly: They have their own power grid.

Muckerman: I wonder who negotiated that.

O'Reilly: Well, think about the Texas mentality. "We could have been our own country if we wanted to."

Muckerman: Could have been. They probably will one day. Who knows? But yeah, you're looking at 77% of all the solar that was installed in Q3. Q3 was twice as big as Q2 of 2016, in terms of installations, and three times as big as Q3 of 2015, so year over year, three times more in terms of solar power capacity was installed in Q3. You're looking at great expectations for Q4. We haven't seen those results out yet. But, about three-quarters of the Q3 installations were of the utility-scale variety. So that means you're looking at potential companies like First Solar or SunPower really benefiting there.

O'Reilly: The price dropped this past year. A lot of the solar stocks you're talking about just now, their stocks aren't doing that great because they're having to cut prices because, at the end of the day, it's a hardware commodity. This is what happened with computers. If memory serves, the prices of these solar cells were dropping 10% to 20% last year. This isn't surprising at all.

Muckerman: Yeah, they're down big, and obviously the market is responding by increasing the demand. You're seeing the parity start to creep up in terms of it costing the same or less to use solar power.

O'Reilly: So I do need to ask, because it lends itself to what we were talking about before -- the switch from coal to natural gas is obviously awesome, lower emissions, etc. Should natural gas be worried now?

Muckerman: Because of solar power and wind power? No, I don't think so. Right now, you're looking at natural gas being the baseload provider.

O'Reilly: Because you do need it overnight. The sun sets.

Muckerman: In terms of aggregate, I'm pretty sure natural gas is --

O'Reilly: Here to stay.

Muckerman: -- multiples above solar and wind right now. That being said, they're catching up. You are talking about doubling and tripling growth quarter over quarter, year over year. That's pretty meaningful. And I don't really see it slowing down. If you talk about reduced costs and utility scale, that's what it's going after.

O'Reilly: They're getting efficient, too. The cheap cells are, like, 19% efficient now. Which, 10 years ago, 10% efficiency was a big deal. The more expensive super-quality cells are in the 23% efficiency ranges. It's getting good, if you want to do something like this.

Muckerman: And I don't know how many homes there are in the United States, but enough solar capacity was installed, supposedly, they're predicting, once they get Q4 numbers.

O'Reilly: I think there's 110, 120 million households. I'm talking about census data. I could be wrong. I don't know how many houses that is, because you have single people in there, too.

Muckerman: Yeah. So, arguably, you have a long way to go. But in 2016 alone, they estimate that enough was installed to power 2.3 million homes. That's a pretty decent number.

O'Reilly: I was going to guess 1 million. That's high. Wow, cool. Gosh, is there any way for us to make money off of this?

Muckerman: Well, I think we had a podcast sponsor a while back, I think it was something like a way to invest in --

O'Reilly: Oh, Wunder Capital.

Muckerman: Wunder Capital, yeah, a way to invest in a portfolio of solar.

O'Reilly: You could also say the solar yieldcos.

Muckerman: Or you just look out for solar, SunPower, SolarCity -- well, I guess [Tesla Motors] (TSLA -1.06%) now, because SolarCity is no longer public.

O'Reilly: You have these facilities, and they're used to making solar cells at certain costs, and they're the older cells now that are being outmoded, so they're currently switching over to the higher-efficiency ones. So I think the next year or two for the solar guys is going to be rough, but long-term, I think if they can keep up with the efficiencies, they'll be OK.

Muckerman: Yeah. And if you want to check out that article Sean mentioned, it's by Travis Hoium, published in the middle of December, titled "U.S. Solar Record Installations: The Future Is Getting Brighter for Clean Energy," and I can't think of anybody better to read than Travis Hoium if you want to learn about solar.

O'Reilly: Yeah, on fool.com, he's our solar guy right now.

Muckerman: As long as I've been at the Fool, he's been covering that industry, not exclusively, but I would place that 75%-85% of his time is spent on solar.

O'Reilly: Yeah, that and harking on Tesla. We love you, Travis. 

Muckerman: And now Tesla's part of the solar regime with their acquisition of SolarCity, the Gigafactory is up and running, only around 15%-20% capacity.

O'Reilly: Yeah, I got a push notification yesterday, I was like, "You didn't tell us, what?"

Muckerman: They're producing lithium batteries, and then the Powerwall, which they're selling --

O'Reilly: That's the trick, of course, with solar and wind -- how do you store this energy, if you don't need it right then?

Muckerman: Tesla might be on the way to figuring it out, at least for the residential side of the business.

O'Reilly: Sweet. Well, thank you for your time, Taylor!

Muckerman: Thank you!

O'Reilly: See you next week!

Muckerman: Yes, sir!

O'Reilly: Well, that is 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]. As always, people on the program may have interests in the stocks that 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!