Even when we're not writing about stocks, we're probably discussing some investment theme or stock that perks our interest. Here's a sneak peek at some of the conversations that go on behind the scenes with some of our writers here at The Motley Fool.
While crude prices tend to drive oil stock prices from day to day, being able to identify the long-term term trends can unlock the best investment opportunities in the space. Tyler, Matt, and I (Jason here) discussed this exact topic recently, and three trends emerged from our conversation that we see playing out in a big way in 2019.
If you're looking to invest in oil and gas, having some understanding of how these trends could play out -- and how they could impact your portfolio -- could go a long way toward helping boost your returns and helping you avoid potential losses, too.
The next wave of LNG facilities in the U.S. are on their way
Tyler Crowe: Liquefied natural gas, or LNG, has been one of the hottest markets for fossil fuels in recent years, and by most estimates, it will remain that way well into the next decade. The rapid declines in costs associated with building an LNG export facility and the recent discoveries of prolific gas reserves have made LNG a much more attractive energy option for high demand places like the Asia-Pacific region, especially those regions where pipeline access is limited. In 2017, LNG demand grew by a spectacular 7.2%, which is unheard of in the fossil fuel industry.
The U.S. has emerged as one of the places that will benefit immensely from the boom in LNG. Shale gas is so cheap in the U.S. that it is a preferred supplier even though transportation costs to Asia are higher than other big players like Australia. There are currently two facilities in the U.S. shipping commercial cargoes of LNG -- Cheniere Energy's Sabine Pass and Dominion Energy's Cove Point -- with another five under construction with planned start-ups next year.
What really has my attention, though, is the next wave of proposed LNG facilities that will likely get a Final Investment Decision (FID) in 2019. According to most analysts, there will be a severe supply shortage in LNG by 2025 from a lack of new facilities getting the green light. That could change, however, if several companies decide to give the green light for a couple of massive projects.
Two that will be slated for FID next year are Tellurian's (NASDAQ:TELL) Driftwood LNG facility and NextDecade's (NASDAQ:NEXT) Rio Grande LNG facility. Both terminals are designed to export about 27 million tons per year of LNG each. Since both companies are just a stock and a business plan right now, their stocks could have immense upside in 2019 if they get regulatory approval for their facilities and start construction. We can likely expect an FID from Tellurian in the first quarter of 2019 and NextDecade's in Q3. If all goes according to plan, then 2019 could be a huge year for investors in the LNG game.
The red-hot Permian Basin has been cooling off
Matt DiLallo: Oil production in the Permian Basin has been growing at an 800,000-barrel-per-day (BPD) annualized rate over the past year and recently averaged 3.4 million BPD. There's just one problem with this high-octane growth rate; the region currently only has enough pipeline capacity to move 3.6 million BPD. With pipelines running out of room, drilling activities in the Permian are starting to slow down.
This slowdown is taking several forms. Some producers in the region are leaving recently drilled wells uncompleted until new pipelines come on line. Meanwhile, a handful of oil companies have announced plans to reduce their rig count in the Permian, which will result in them drilling fewer wells in the coming year. On top of that reduction in growth-focused activities, there's a possibility that some oil producers might need to turn off a few of their producing wells until space frees up on the region's pipeline system.
Not only are these pipeline issues impacting producers, but they're also starting to pinch the profits of oil-field service companies. Halliburton (NYSE:HAL), for example, recently said that while "we thought there would be a downturn in activity [in the Permian] due to budget constraints and takeaway issues... it's more than we expected." Because of those issues and some others, Halliburton's third-quarter results will come in $0.08 to $0.10 per share below expectations. Meanwhile, its outlook for 2019 is dimming due to the slowdown.
Because of the Permian's pipeline problems, 2019 could be a more challenging year for the U.S. oil patch than many currently anticipate. That makes it something investors need to monitor since it could cause Permian-focused oil stocks to underperform rivals until new pipelines start-up toward the end of next year.
The offshore recovery is heating up
Jason Hall: Since early 2016, many oil and gas stocks have rebounded, delivering a pretty decent rate of return. However, offshore drilling contractors have continued to struggle, costing investors plenty of losses along the way.
In short, new work started drying up in 2015, and the past three years have seen new investments in offshore oil development fall to some of the lowest levels in decades. And over that time, there's been a massive rationalization of the global fleet. Hundreds of vessels have been removed from operation, with the oldest and least capable of those mostly sent, literally, to the scrap heap.
At the same time, there has been a tremendous amount of consolidation (like this and this and this), leaving fewer -- stronger -- companies operating just when work is starting to pick up. Here's a look at quarterly revenue for Diamond Offshore (NYSE:DO), Transocean (NYSE:RIG), Ensco PLC (ADR) (NYSE:ESV), Noble Corp. (NYSE:NE), and Rowan (NYSE:RDC) so far this year.
Yes, with the exception of Transocean (which has made several revenue-boosting acquisitions), revenue is down from the beginning of the year. But with the exception of Diamond Offshore, all of the other offshore drillers reported double-digit sequential revenue growth in the second quarter.
And there's good reason to think this trend will accelerate. In a recent presentation, Transocean pointed out that the offshore projects given the green-light in the first half of 2018 were worth more than the entirety of offshore investments made in 2016, and it looks like this year's total offshore investing awards will exceed 2017's total by nearly 50%.
Yet offshore drilling stocks still trade, on average, for less than half of tangible book value. With plenty of deep value to be found, and strong signs of a recovery, offshore drilling stocks could be set to surge in 2019.
Jason Hall owns shares of Diamond Offshore Drilling, Ensco, Noble, Tellurian Inc., and Transocean and has the following options: long January 2019 $15 calls on Transocean. Matthew DiLallo has no position in any of the stocks mentioned. Tyler Crowe owns shares of Tellurian Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.