The Best Way to Profit from the Big E&Ps

One of the drilling services companies our analyst Joel South highlights in this video is Halliburton. Domestic oil & gas service companies have taken a hit in the recent past due to a slowdown in the natural gas drilling boom of the last couple of years. As this market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.

Brendan Byrnes: Hey, Fools, I'm Brendan Byrnes and I'm joined today by our Energy Analyst, Joel South.

Joel, we were talking earlier about how more and more E&Ps are having to spend more money trying to find new drilling locations. You had a different take on maybe another play that could take advantage of that, that's not the big E&Ps. Let's talk about that.

Joel South: Sure. Really, for most people looking to add energy to their portfolio, they usually go with a lot of the bellwethers, the ExxonMobils, the BPs, but really it's time to start looking away from that.

I see more growth in the service plays. You can look at Shell's (NYSE: RDS-A  ) earnings, for example, and what they're looking for, for 2013. They're having record capital expenditures. They're looking at $33 billion in 2013. The reason this is reserve replacement is key for the big oil, and it's getting more difficult to find these plays.

Look at what Shell had to do toward the end of 2012. They moved the rig offshore Alaska, it was beat before the drilling even started. As you move offshore, move into these Shell plays that are quite a bit more expensive, it's really getting to the point where you're spending all your capital expenditures trying to find new drilling locations to add the reserve replacement.

There's no guarantee there. You can either find the oil ... most of the time you're going to have to move on because it's not economically viable. What you're stuck with is really not the revenue growth that you're seeing.

This past year Shell, in their earnings, their production growth was up 3.5%. Revenue earnings per share, a two-cent gain, year over year.

It's really not there, where if you look at a Halliburton (NYSE: HAL  ) and Schlumberger (NYSE: SLB  ) , all of their future and all of their cash flow is coming from providing the services. They're growing and putting a lot of their R&D in this field, so they're the ones that are collecting the money and they're growing, as a whole.

Another company you could look at that had earnings yesterday, Core Laboratories (NYSE: CLB  ) . Their focus is, they're going in, doing the studies for these plays and trying to increase the yield that the oil companies are getting.

This is another example where you can really benefit off the E&Ps having record capital expenditures this year because they need that yield, and they're a company that had record revenue and earnings this last quarter as well, because they're coming more and more into demand.

Brendan: Interesting take. For investors, maybe take a look away from the big E&Ps. Look more toward the services area. Joel, thank you for your time, and thanks for watching. Fool on!


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