Check out the latest McDermott International, U.S. Silica Holdings, and Denbury Resources earnings call transcripts.
What happened
Shares of three companies with heavy ties to the oil and gas business surged on Jan. 2. McDermott International Inc. (MDR), U.S. Silica Holdings Inc. (SLCA), and Denbury Resources Inc. (DNR) closed up 9.5%, 10.5%, and 14.6%, respectively, on the day.
Easily the biggest catalyst for all three stocks was oil prices. Both Brent and West Texas Intermediate crude oil futures moved up over 2%, continuing a recent trend that's seen crude prices gain almost 9% since bottoming out on Dec. 24.
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So what
Interestingly enough, only Denbury Resources, an independent oil and gas producer with major operations in several shale plays in the U.S., gets a direct benefit from higher crude oil prices. McDermott, the engineering and construction giant in the energy sector, and U.S. Silica, a sand provider for fracking operations, don't collect a single penny of their revenues from the sale of oil.
So why the optimism? U.S. Silica does get some indirect benefit, since the sale of fracking sand is directly tied to onshore U.S. oil production. In short, higher oil prices make it more profitable to develop shale oil, and the development of shale requires tons and tons of sand to prop open the fractured shale and remove the oil. Furthermore, shale reserves can be developed much more quickly than other oil plays, leading to faster turnarounds and more demand for sand more quickly.
For McDermott, higher prices are beneficial over the long term, since they are generally a product of strong demand, which means increased need for its engineering services and the projects it helps design, build, and support across the oil and gas value chain.
Now what
The big driver behind today's surge in oil prices is critically important to note -- or more specifically, what it wasn't a product of. Oil prices went up today primarily because fewer shipments of crude out of Saudi Arabia were counted in December, indicating that the country's promise to cut oil production to help prop up crude prices is holding true.
That's good for oil markets, but on the other side of the equation -- demand -- the news isn't so good. Word is, demand for oil from Asian manufacturing is weakening, something that could indicate a global economic slowdown, which would not be good for oil prices, or these three companies.
Add it all up, and it's another day of volatility for many oil stocks, but not really any serious material news for any of these three companies. Of the three, U.S. Silica is the only one that makes my list of being buy-worthy at the moment.
