What do you get when you combine an increase in demand, a decrease in existing supply, and a price that rewards the development of new supply? A formula that spells opportunity -- in this case, for companies providing equipment and services to the oil industry.
Check out some of the recent industry developments. U.S. oil companies with holdings in Libya recently received White House permission to resume negotiating deals to develop oil fields that were once stalled by sanctions. ExxonMobil (NYSE:XOM), like its rivals, is looking to increase production in areas like West Africa, Asia, and the former Soviet Union as the oil reserves from older North American and European fields have suffered from declining production.
In the first two months of 2004, Royal Dutch Petroleum (NYSE:RD) and El Paso Corp (NYSE:EP) cut their proven reserves estimates between 20% and 40%. Saudi oil fields are in decline and may not be able to meet their responsibility in growing oil demand.
Frequently, we are reminded that global economic growth, most notably in India, Russia, and China, continues to fuel new demand for oil. The final piece to this puzzle is the price of oil. Since the OPEC cartel's Feb. 10 decision to cut supply quotas, oil has maintained a price north of $30 a barrel. This provides a strong incentive for oil companies to keep existing wells in top condition and encourages exploration and discovery of new supplies.
A quick glance at the industry revealed more than 70 publicly traded companies with market caps over $100 million. Luckily for investors, there's a way to participate by owning a "basket" of companies that provides "drilling, well site management, and related products and services to the oil service industry," through Oil Service Holders (AMEX:OIH). The basket consists of mostly large-cap names recognized as industry leaders. Among the 18 names in this basket are Halliburton (NYSE:HAL), Smith International Inc. (NYSE:SII), and Schlumberger Ltd. (NYSE:SLB).
This basket of stocks currently trades around $68, below its 52-week high of $75.28 and above the low of $53.15. Shareholders are entitled to dividends, which are paid out by about one-third of the companies.
Unlike trends in teen clothing, or the latest electronic gadget, or the speed at which new and improved computer chips are developed, finding and drilling for oil is a much longer cycle. And it's a cycle, I believe, that is still in the early stages of development. Through Oil Service Holders, investors can benefit from this trend by buying into a group of companies, rather than just trying to pick out one or two from the bunch.
Are you invested in companies that pay you to hold them? Check out Mathew Emmert's Motley Fool Income Investor , free, for 30 days then.
Motley Fool contributor Glen Trematore can be found training for endurance events in the parks of Virginia Beach. He has no stake in any of the companies mentioned here.
