Low oil prices have big oil stocks dropping -- some hitting historic lows -- while other companies spike and plummet unpredictably. This may put fear into some investors, but for us, we hope it lasts a little while longer so we can put more money into our favorite energy investments!
In this week's segment of Industry Focus, Motley Fool Analysts Tyler Crowe and Taylor Muckerman look at some of their favorite energy investments right now with oil prices still struggling in that $60 per barrel range, and also take a quick peek at a few environmental regulations that may have flown under the radar since the world seems to be awash with oil.
A full transcript follows the video.
Tyler Crowe: Want to know what we want for Christmas? You've got to stay tuned to find out! This is the energy edition of Industry Focus.
Hey everyone. It's Thursday, we're on Industry Focus with energy. Obviously, when we do this on Thursdays, it's Taylor. I'm Tyler, and we're going to get straight into it. First thing, let's start. Oil prices. What have they done?
Taylor Muckerman: Oil prices! Hey, they're around $50-60, whatever.
Crowe: Who cares? It doesn't matter.
Muckerman: They're down.
Crowe: They're moving. As far as anything that's happened tangibly, lately?
Crowe: No, nothing's happened. A few news stories here, a few news stories there; nobody really cares. Stuff has gone through the roof. We watched a few oil stocks that have just absolutely skyrocketed the past couple of days.
Muckerman: Yes, the past couple of days.
Crowe: But in terms of actually anything tangible, we're still waiting and seeing what really happens.
Muckerman: Yes. It's not settled yet. Companies are going to spike and they're going to fall the next few months without any real reason why, other than oil prices and traders just moving the market a little bit.
Crowe: Yes. Even though there are really no stories going on, I guess the story of cheap oil has brought along a few ... I guess you could say political things that happened in the past couple of days.
Muckerman: Yes, gateways here.
Crowe: A couple gateways we thought we'd talk about today, the first one being that in the state of New York they have banned hydraulic fracturing -- a governor decision by Governor Andrew Cuomo -- and at the same time, President Obama has put a ban on drilling in the Bristol Bay in Alaska, both of these things happening recently.
Bristol Bay, there's been a de facto ban for several, several years now. They've been trying to protect sockeye salmon fisheries up in the area, and New York has been very highly contentious for the past few years in terms of trying to get hydraulic fracturing because of the Marcellus Shale, but there's been a lot of local resistance to it.
In terms of the grand scheme of things, do you see anything changing because of this at all?
Muckerman: No. I just look at this as far as cheap oil, and now we're saying we have too much oil being produced. So, sure. Why not put a ban on fracking in these areas, because we don't really need it right now so it's a little easier to do this, slide it right under the radar of prices collapsing, Saudi Arabia starting a price war, "We're going to put a ban here."
That's fine with me, as far as the Bristol Bay is concerned. I read that it provides about 40 percent of America's wild-caught seafood. I love seafood, I don't need oil coming from this specific region to disrupt that. If the Gulf of Mexico incident happened there ...
Crowe: Yes, that's a different story.
Muckerman: I don't even want to begin to think what happens to the price of seafood in the supermarket for generations to come, so that's fine.
With New York, kind of maybe screwing Boston a little bit here because the prices of natural gas in the New England area are always much higher than they are a little bit further south, because New York kind of sucks it all dry from the pipelines as it's passing through and they're not doing their part to produce any extra to push along further north. Maybe they're just sticking it to eh Boston rivals, who knows?
Crowe: A little added rivalry for those Red Sox/Yankees, or ...?
Muckerman: That's right, the Red Sox/Yankees.
Crowe: Or Celtics/Knicks, or something like that.
Muckerman: "We're keeping our gas to ourselves," essentially. Who knows if New York even has enough gas to really start to drill their own? There are companies out there that want to try and see, but right now we don't know what we're missing out on and I'm fine with not knowing for the foreseeable future.
Crowe: Yes. Geologically speaking, if you look at the maps of the Marcellus Shale, there is clearly an extension of the Marcellus Shale up into New York State. However, it's not exactly what you'd call the sweet spot of it.
Muckerman: No, it's not exactly tested, either.
Crowe: Exactly, it's not really tested. There's not a whole lot of companies -- I don't want to say "legitimate" companies, but companies that are actually producing oil and gas -- there's nobody that has any interests of what's going on in that area.
From an investor's standpoint, I don't think anybody should get too up in arms over what's going on here, because the long-term impact of anybody in this space isn't really going to be affected by this in any way.
Crowe: They've got plenty and plenty of drilling to do in the Gulf of Mexico, like you mentioned. There's other places in Alaska for offshore. Then looking back at the onshore, inland, there is still plenty of drilling left.
Muckerman: Yes, no shortage.
Crowe: Pennsylvania, Bakken, Eagle Ford; I don't think anybody is hurting for a lack of drilling at any time right now.
Muckerman: And pipelines aren't sitting empty right now. They can't build pipelines fast enough, so no one's missing out on New York. Maybe it will just be a nice way to preserve some of our own natural reserves for when we actually do need them.
Crowe: It will be interesting to see if oil or natural gas prices were, let's say 10-15 years down the road, to start climbing again because we've hit all the sweet spots in shale drilling or something like that ... if all of a sudden these bans or that environmental resistance to it all of a sudden starts to wane again when everybody is looking at $6-7 for a gallon of gas for something like that -- totally hypothetically.
Muckerman: I could see in 10-15 years the technology being around to where people aren't worried about these drilling methods anymore, and it can be done provably and safely beyond what we already know now, because it's still fairly new to everyone, fracking.
In 10-15 years we're going to be advanced enough, in my mind, to where there's nothing at all to worry about.
Crowe: Yes. Overall, not a whole lot going on here.
Crowe: But since it is one week from Christmas, this will be the last show that we do before Christmas. Obviously we are doing a live show on Christmas.
Muckerman: Yes, that's right. We're Foolish enough!
Crowe: We are doing a live show on Christmas.
Muckerman: We're Foolish enough to do that.
Crowe: Don't think about anything else. But before Santa arrives at everybody's house I thought I would ask if you got to ask Santa for anything right now, as an energy investor, what do you want?
Muckerman: Right now, I'm a shareholder in Halliburton (NYSE:HAL) and I have been for a while, so I want the Halliburton Baker Hughes (NYSE:BHI) deal to go through. If not, Halliburton has to pony up $3.5 billion to Baker Hughes. I don't really want to see that leave the coffers with nothing in return, as a shareholder.
If the deal does go through, they're going to be selling off a pretty significant amount of assets, likely, in order to appease the regulators so they'll be flush with more cash. They can go out, put it into R&D, grow in international regions -- or maybe up the dividend a little bit, which is right now below a 2% yield.
If this goes through, I could see a bright long-term future. I'm a five-year oil bull, maybe even 10 years, so Halliburton I think will be at the forefront of whatever happens in the oil and gas industry.
Baker Hughes into the fold, which has traditionally underperformed, if they can put some of their Halliburton technique and research and development methods into Baker Hughes, maybe that company can turn around a little bit as well and the margins will widen for the newly acquired portion of the business. I see, if that deal goes through, a bright four, five, six years for Halliburton afterwards.
Crowe: Fair enough.
Muckerman: What about you? What's in your stocking?
Crowe: All right. Well, I don' know if it's a stocking, but what I want more than anything else is I want the market to continue to act completely irrationally for the next few more months, so I have a few more paychecks coming in.
Muckerman: That's right!
Crowe: And I can put a little bit more money into some energy stocks. I'm looking at this right now, and even though we've had a little bit of increase in oil prices, and we've seen some big share price increases in the past couple of days, it still seems to me like there is a lot of undervalue in the oil market.
Not just like you said, 5-10 year oil bull. I look at even further out from that. I'm looking like 20-30 years down the road. Even though, as you've seen, developed world demand has been relatively flat since 1979 all the way up until today, so over almost a 30-35 year period OECD nations, developed nations, have been flat.
All growth has come from developing nations. Over the next 30 years, that growth is still only going to come from developing nations; probably, by most estimates, another 20 million barrels per day.
If we're looking out on that really, really long-term track, there is a lot of room to grow for almost everybody in the sector, so I'm looking at a lot of depressed big oil companies right now -- very stable, somebody like an ExxonMobil. I'm also looking ...
Muckerman: They're at like a 10-year low or something like that, something ridiculous, hitting 52 week lows almost every day.
Crowe: On a valuation standpoint, they are below their 10-year median valuations. You also look at ... I still am very bullish on Seadrill (NYSE:SDRL). Somebody might call me crazy! But with a new fleet like that and everybody else's is getting older, in the next 5-10 years those fleets are going to have to turn over and Seadrill is in the best position to do that.
I'm looking at companies like this and saying, "Further down the road, this small blip on oil prices is just a pimple. Nobody's going to care. This thing's going to pop, oil prices are eventually going to probably recover. But looking at the long-term demand prospects, there's just plenty of room for these companies to grow and I feel like it's a really opportune time.
Hopefully I can get a couple more paychecks into those investments before it actually happens.
Muckerman: People look at the last couple days and think, "Oh my god, oil companies are up 5-10%." Compared to the 40% drop, you need to make up more than 40% upside.
Crowe: That is certainly true.
Muckerman: There's more than 40% to return back to where we were previously, just a few months ago. Like you mentioned, if they stay undervalued for a little bit longer, the retirement fund might thank you.
Crowe: Hopefully! That is it until Christmas. We will see you on a live show this Christmas.
Muckerman: Christmas Day, yes. Hot cocoa or something like that.
Crowe: We will be here. For Taylor, I'm Tyler. Thanks for watching.
Taylor Muckerman owns shares of Halliburton. Tyler Crowe owns shares of Seadrill. The Motley Fool recommends Halliburton and Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.