I've got to admit it. A couple of days ago, I gouged a poor, unsuspecting buyer. I put a limit order in to sell an overpriced stock at a price well above the market. And, sure enough, somebody bought it. Can you imagine ExxonMobil (NYSE:XOM) doing the same thing? If it really wanted to gouge, it would pull supply off the market until the price went to four or five dollars a gallon.
I know. It's not the same thing. The guy who bought my stock didn't need it to survive or get to work that day. But you would think the average gasoline consumer should realize by now that gas prices might rise substantially at certain times. Why not take it to heart and get rid of that gas-guzzling SUV?
Solutions worse than the problem
Yes, the major oil companies are an unpopular group right now. Bill O'Reilly wants a boycott. Sen. Chuck Schumer wants to break them up into lots of little companies. Sen. Chuck Grassley wants everyone to drive 3% fewer miles this year. Others want a windfall-profits tax. And I find it remarkable that politicians and environmentalists who have done everything in their power to restrict supply are now crying that the price of oil is just too high. To make matters worse, most of their supposed solutions to the problem will probably restrict supply even more. Go figure.
Where the money is
Politicians will be politicians. But there seems to be one group that, barring a collapse in oil prices or a revolutionary new energy source, will continue to benefit from the oil shortages regardless of what the clowns in Washington do -- the companies that engage in oil exploration. ConocoPhillips (NYSE:COP) gave us a hint in its first-quarter earnings release that this could be an area to watch when it boasted of spending 141% of its net profit on exploring for oil. ConocoPhillips can be the good guys by continuing to spend its money this way, and the oil service companies are the beneficiaries. But which ones to buy?
The big, well-known companies in the industry are Schlumberger (NYSE:SLB), Weatherford International (NYSE:WFT) and Baker Hughes. I'm sure that in the current environment, they will all do quite well, but their price-to-earnings multiples of 30 and up already discount some of the coming good news. Instead, I prefer to concentrate my investments in companies that are not as well known and sell at more attractive valuations. My current holdings include Maverick Tube (NYSE:MVK), Oil States International (NYSE:OIS), and Lufkin Industries (NASDAQ:LUFK). They all have current P/E multiples in the teens, or around half that of the bigger companies mentioned earlier. These are not tiny companies, though -- they have market caps in the range of $1 billion to $2 billion.
Let's take a quick look at just one of these companies. At Oil States, five-year average annual revenue growth, supported by some acquisitions, has been excellent at 30.58%, almost three times the industry rate of 11.09%. On the negative side, the company has a slightly lower return on capital than the industry and also carries a higher debt-to-equity ratio. The current P/E ratio is only 16.9, compared with the industry's 29.4. And other valuation ratios, including price-to-sales, price-to-book, and price-to-cash flow all sit substantially below industry benchmarks. My other holdings are also attractively valued compared to the industry.
Topping it off
I don't own a crystal ball to forecast the future price of oil. But unless the politicians get their act together -- which is highly unlikely -- or there is some revolutionary substitute energy product invented, I think the price of oil will stay high enough to create incentives for the oil companies to spend large amounts of money exploring for new sources. The oil services industry should be a major beneficiary.
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Fool contributor Richard Moore remains committed to capitalism and free markets. He owns shares in ConocoPhillips, Maverick Tube, Oil States International, and Lufkin Industries. He welcomes your feedback.
