What happened

Shares of stocks across the oil and gas industry surged in December. These included shares of independent exploration and production company Noble Energy (NASDAQ:NBL), and oilfield services companies Halliburton (NYSE:HAL) and TechnipFMC (NYSE:FTI) The three companies' shares were up 19.7%, 16.6%, and 13.8%, respectively, according to data provided by S&P Global Market Intelligence.

This largely mirrored the performance of the oil and gas industry as a whole. Industrywide funds SPDR Oil and Gas Exploration & Production ETF and SPDR Oil and Gas Equipment & Services ETF rose 16.4% and 18.1% for the month, respectively. 

A smiling man stands next to a cloud of paper currency bursting from an oil drum.

When oil prices go up, oil stocks outperform. Image source: Getty Images.

So what

The price of crude oil was the major factor in the companies' December outperformance. After a rocky summer in which prices plunged, oil closed out the year with a sustained three-month rally. An early December OPEC production cut helped keep prices on the rise in December. For the month, the international benchmark Brent Crude spot price rose 5.1% to finish the year at $67.77/barrel, while U.S. benchmark WTI Crude was up 9.2% to close out 2019 at $61.14/barrel. 

While rising oil prices helped Noble Energy, it also had some good news from its gas operations. On December 31, the company announced that it had begun production at its aptly named Leviathan offshore field in Israel. Leviathan, which the company touts as "the largest natural gas field in the Eastern Mediterranean," is expected to initially produce 1.2 billion cubic feet of natural gas per day, with further development projected.

While Noble was ramping up production in the Mediterranean, a slowdown in North American drilling activity was weighing down third quarter earnings at both Halliburton and TechnipFMC. However, Halliburton responded by promising aggressive cost cuts to ease what it sees as continued weakness in the sector.

TechnipFMC's December performance lagged its oilfield services peer Halliburton. Although both companies released poor Q3 2019 earnings reports in October, TechnipFMC's bottom line in particular fell way short of expectations. Management hopes to turn things around by splitting into two companies: an oil and gas engineering and construction company, and a more traditional oilfield services company. Investors may be waiting to buy in before the split occurs.

Now what

In the new year, as was true in December, one of the biggest issues that will affect share price growth for these companies -- and the industry generally -- is the price of oil.

In December, the U.S. Energy Information Administration (EIA) projected that Brent Crude spot prices would average $61/barrel in 2020, while WTI Crude would average $55.50/barrel. It cited a forecast of "rising global oil inventories, particularly in the first half of" 2020. Here's how that would compare to averages in recent years:

Benchmark 2017 Average per Barrel Spot Price 2018 Average per Barrel Spot Price 2019 Average per Barrel Spot Price* 2020 Average per Barrel Spot Price*
Brent Crude $54.15 $71.19 $63.93 $61.00
WTI Crude $50.79 $65.06 $56.74 $55.50

*Estimate as of 12/10/2019. Data source: U.S. Energy Information Administration. Chart by author.

Those projected average spot prices are lower than they've been for the last two years, and much lower than current prices. However, the EIA's estimate is just that, an estimate, and it could be way off. Nobody knows where oil prices are heading. News of the U.S. drone strike in the Middle East caused oil to briefly spike about 4%, before easing back down. However, the situation remains uncertain and could lead to higher prices -- which would likely benefit these three companies -- or not much of anything. 

TechnipFMC hopes to make its split into two pure-play companies in the first half of this year, and until that dust settles, investors bullish on oil prices would be better off considering Halliburton or Noble. Investors who think oil prices are likely to sink probably want to steer clear.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.