Here's How to Stabilize Your Energy Portfolio

We've entered 2014 amid minimal concern about possible oil price movements during the upcoming year. After all, U.S. wellhead prices averaged $95.73 in 2011, $94.52 in 2012, and (a still estimated) $96.21 last year. Clearly, crude levies have stopped bouncing about as they did with the 72% leap between 1998 and 1999 or the 40% drop from 2008 to 2009. There's no longer a need to concern ourselves with major year-to-year fluctuations.

Or maybe there is.

Indeed, the potential for a meaningful jump or slide in crude prices appears sufficiently realistic that I'm inclined to urge energy investors to include members of the services side of the oil and gas group in their portfolios. My favorites are Schlumberger (NYSE: SLB  ) , National Oilwell Varco (NYSE: NOV  ) , and Halliburton (NYSE: HAL  ) . I'll tell you momentarily why I believe services represent a key ingredient for energy portfolios and why those three names bob to the top.

In a recent issue, the prognosticators at the Oil and Gas Journal forecast relatively minimal changes in 2014 hydrocarbon metrics. The magazine clearly based its predictions on a status quo in the geopolitics of the Middle East, North Africa, and Asia. But If you examine those locations, there appear to be prospects for either 1) new crude coming online, typically a price depressant, or 2) conflagrations within and among producing countries that could easily catapult prices skyward.

The basic forecast
According to the Journal's forecast, global crude worldwide consumption growth is likely to amount to about 1.1 million barrels per day this year, boosting total demand to roughly 92.1 million b/d. Most of that increase is likely to occur in the developing nations.

There's a similar picture on the demand side. Total global output is expected to ascend from 91.5 million daily barrels to 93 million, obviously with much of the delta occurring in the U.S. About 200,000 b/d will likely be added by the countries in the former Soviet Union, Latin America, and Africa.

Nevertheless, there are those who think a price plunge could occur. In the face of steadily increasing U.S. production, The Wall Street Journal recently quoted Sabine Schels, head of fundamental commodity research for Bank of America Merrill Lynch, as saying that, "In the next 12 to 24 months, unless any of these (US. crude transportation) bottlenecks are solved, we could see WTI going down to $50 a barrel, to incentivize producers to slow down."

A Middle Eastern powder keg
A move in precisely the opposite direction could conceivably be set off by the steadily worsening affairs in the Middle East, especially in Iraq. Al-Qaida has pretty much had its way in that country of late, essentially claiming Ramadi and Fallujah. Those two Anbar Province cities were the sites of more than a little bloodshed when U.S. troops were battling in Iraq, beginning in 2003.

I've noted to Fools since back in 2007 that the real danger of a lawless Iraq, wherein internecine squabbling between Sunni and Shia Muslims is nearly constant, lies in the country's geographic position. Only that war-torn country separates largely Sunni Saudi Arabia from fervently Shia Iran, two countries that, to put it mildly, aren't pals. Should Iraqi contretemps intensify and spill over to its two neighbors, as much as 18 million gallons of daily crude production could be jeopardized. The resulting effect on global oil prices requires no explanation.

The need for stability
With those looming -- albeit widely divergent-- prospects on the horizon, why do I fervently believe that oil-field services companies belong in your portfolio? And why have I specifically focused on the abovementioned threesome?

For starters, the products and services of all three find their way throughout the producing world, meaning that they'd be better able to cope with local or even regional disruptions than more localized companies. At the same time, given the nature and duration of their customer contracts, it would likely require a protracted global price cataclysm to affect their share values meaningfully.

A top-notch trio
Schlumberger is, as you know, the kingpin of the oil-field services sector. It provides a vast array of products and consulting to all types of producers. It's a technology leader, spending about $1.1 billion annually to up the ante on exploration and production innovations. The company is a seismic guru, and its new subsea venture with Cameron International bodes well for its ascension in that rapidly expanding area.

National Oilwell Varco is the key provider of systems and equipment for drilling rigs, both on and offshore. With the industry attempting to correct a shortage of all types of offshore units, Varco enjoys a key spot in the sector. The vast majority of its products are used internationally.

Halliburton also provides an array of products and services to producers worldwide. Its two operating units are key to the world's expanding offshore production and to coaxing oil and gas from unconventional formations onshore.

Foolish takeaway
There are other attractive members of the services sector, but these three companies are especially appropriate for attaining growth and stability during what could be a period of bouncy crude prices.

Focusing specifically on the U.S. energy picture, you know well that we're bearing down on record production of oil and gas. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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David Smith

A longtime securities analyst and multiple-term member of The Wall Street Journal's All-Star Research team, Dave specializes in energy and natural resources.

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8/28/2015 4:03 PM
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