by Travis Johnson, Stock Gumshoe | October 24, 2014 1:01 am
The carnage in energy and oil[1] services stocks over the last six months or so is causing a lot of contrarian investors to sit up and take notice — the combination of lower perceived demand (because of efficiency, slower growth in China[2], and the recession in Europe) and increased supply (because of the huge shale fields in the US, among other discoveries) is wreaking havoc… as many of us have seen in our portfolios.
But while West Texas crude has fallen perhaps 20% or so from the recent highs, the stocks of oil companies and oil services[3] firms have fallen in some cases by 40% or 50% or more. So does that represent opportunity?
Maybe so. If that makes sense to you, and you don’t expect oil to fall to $50 or below, then you’re probably sniffing around for opportunities in the oil patch. The Motley Fool[4] is here to oblige with a teaser pitch that will grab the eye of any energy investor… so I’ll sift through the clues and identify the stock for you, and you can let me know whether it’s a fit for your portfolio.
Here’s how the Fool introduces their latest pitch, which is aimed at grabbing new subscribers for the Gardner brothers’ flagship Stock Advisor[5] newsletter:
“Imagine being among the first investors to stake a claim in the fast-emerging megatrend oil barons are already touting…
“‘As significant as the discovery of oil itself!’ ….
And the ad catches our eye with the riches enjoyed by some of the folks who are profiting from this boom — with the implication, to this Gumshoe’s ears, that investors will profit similarly if they follow the Gardner brothers’ advice. Here’s the example they start with:
“Last month, a six-figure check carefully addressed to Richard Dockery arrived in the mailbox outside his brand-new, 2,400-square-foot home.
“This wasn’t the first check of this size that he’d received. And it certainly won’t be the last…
“In fact, these checks arrive every single month like clockwork….
“My friend, I’m talking about millions upon millions of dollars in annual income here. The kind of wealth that ordinary folks like you and me are usually only allowed to dream about….
“… traces Dockery’s newfound riches all the way back to an emerging U.S. megatrend already being tabbed ‘Oil Boom 2.0’ by energy colossus BP.
“And it has everybody from hotshot oil bigwigs to generally poker-faced investment websites to the world’s greatest investor at a FEVER PITCH….”
So that’s true — this Dockery guy really is getting huge checks in his mailbox, and it really is from this “Oil Boom 2.0” … but that’s because he’s a real estate[6] broker who lives in the middle of the Eagle Ford in Texas, and he rents land to some work camps and water[7] drillers and also bought into some wells to receive royalties.
Oil is big, discoveries generate windfalls for people who are lucky, prescient, or smart about getting in on the discovery early… so there are obviously lots of people getting wealthy in the Eagle Ford, and the Permian Basin, and the Bakken[8] (and a lot of people getting the shaft in these towns, too — imagine living on a teacher’s salary and not owning land when oil millions come to town and your rent triples). The Dockery story is from an fracking[9]/4481977/">article that ran in USA Today back in January, if you want to check i tout.
But the Motley Fool is not telling you to move to Midland, Texas, or any other boomtown, they’re just painting the picture of how much wealth is being generated… so you’ll be enticed to get on board with whatever their strategy is for generating oil wealth.
Got it? So what is their strategy? As you can imagine, it’s buying some kind of oil stock. For which one, let’s check the clues (and further enticements) they provide:
“… what is the point of telling you about all of the people making money here if I’m not going to give YOU a chance to join them?
“Still dubious? That’s okay… I’m not writing to cynics today. I’m writing to keen, forward-looking investors aspiring to fulfill the American Dream just like Richard Dockery did….
“All it will take from you is a dash of daring… and perhaps taking a few small steps outside of your usual comfort zone.
“Here’s how we’re going to do it…
“After hours upon hours of tireless research, two of the most brilliant investors I’ve ever met recently uncovered a surprising way for everyday folks like you and me to grab OUR fair share of this fast-emerging megatrend.”
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Those “brilliant investors” are, of course, Dave and Tom Gardner[10], the brothers who founded the Motley Fool as an AOL chatroom and rode to fame on the back of the internet boom in the 1990s. And they have, indeed, put together a very good long term record at Motley Fool Stock Advisor[11] (though that does not mean, of course, that they always pick good stocks or delight everyone — they also tend to be extremely long-term holders, holding through huge swoons, and that makes a lot of readers mad even if many of those stocks do eventually recover).
And the “surprising way” they’ve found for you to ride this “fast-emerging megatrend?”
Well, they run through a long exposition about the fact that there is a ton of oil buried in shale formations that hasn’t yet been found, that hydraulic fracturing opened them up to this “revolution” thanks to the pioneering work of George Mitchell, and that most people still know nothing about this “Oil Boom 2.0”. You’re not in the “most people” camp, I imagine, since investors have been chattering about this at least since the first Bakken craze almost a decade ago, so we won’t dig through the details of that…. but we finally do get to the clues about what stock they pick:
“The Backdoor Holy Grail Investment into ‘Oil Boom 2.0’…
I can promise you up front that you WON’T have to pick up and move to anywhere else in the country…Nor will you have to hop on a plane to visit North Dakota, Texas, or any of the other numerous shale sites buried throughout America…
“And here’s the best part. Unlike Richard Dockery and those 2,000 North Dakotans a year, you won’t even have to lease your land to be drilled on 24/7 by rabid oil companies.
“No gaping holes in the ground… no pungent oil smell… no ear-piercing drilling… and no strangers prowling about your home at all hours of the day.
“In fact, you won’t have to give up anything at all!
“Because what if I told you there is actually a quick and easy way to invest in EVERYTHING I’ve told you today about ‘Oil Boom 2.0’ – WITHOUT even having to invest in the drilling process itself?”
Ooh, ooh, what is it!?!?
“A single, under-the-radar company that has its hands tightly wrapped around both the hydraulic fracturing technology and know-how that has allowed this shale boom to take off in the first place.”
OK, so sounds like it’s some kind of oil service company — not an actual driller, probably. Some more clues?
“Legendary hedge fund manager and CNBC TV host Jim Cramer is also banging the desk on this company, saying…
‘When it comes to tech stocks in the oil patch, my view is that you need to look no further than XXX XXXX.’
‘The company has the best technology in the business. Including figuring out the best way to approach and design the process of hydraulic fracturing – the drilling technique that’s unlocked all the oil in the shale plays that I’m constantly talking about.’
“He even told their CEO, ‘In the sweet spot, everyone is turning to you….'”
“This company actually provides a series of vital shale-related services for Big Oil clients….
“A highly valuable business model based around three core services and… most important… minimal competition. As Morningstar[12] puts it, their ‘Competitive position is so strong that they have no direct rivals.'”
Huh. Well, that’s a lot of clues and hints — so we can probably name the stock for you based on that info, but let’s check and see what the Foolies say about those three “core services” first…
“Business 1: Fluid Sampling
“… whenever a client of theirs thinks they’ve uncovered a new oil field, the first thing they do is grab the phone and dial up our “Holy Grail shale company”…
“Who then collects numerous fluid samples from the potential new oil field. And performs a complex analysis that tells their client not only whether the area is actually rich in oil… but also what quality of oil they can expect to find if they drill there.
“It’s like playing the lottery and being told the numbers beforehand!
“Just think about the disadvantage you’d be at as an oil driller that didn’t contract with our ‘Holy Grail shale company….'”
OK, that sounds pretty important. I’m not an oil expert, so I don’t know if there are lots of different competitors in this “fluid sample analysis” business — but it sounds like Morningstar thinks they’ve got a “moat” too, so that’s a solid endorsement.
More?
“Business 2: Oil Well Production Enhancement
“But here’s where their business really starts to get interesting. It’s what initially made me such a rabid believer in their forward-thinking sales strategy in the first place….
“they help the client squeeze as much oil out of the well as possible, before having to drill a new one (remember it costs $4 million!). This includes selling them high-priced fracking equipment, telling them how often to frac, and even providing clients with top-of-the-line imaging tools that map out the oil well.
“This company truly does sit dead center in the crossroads between shale plays and oil-drilling technology.”
And finally…
“Business 3: Intellectual Property
“As Morningstar puts it, they ‘Possess decades’ worth of geologic data accumulated from oil fields around the globe. The time and capital required to duplicate these databases, if possible, represent a nearly insurmountable obstacle for competitors.’
“And while those decades of experience are obviously great for our peace of mind, they also yield a surprising new business opportunity…
“You see, our ‘Holy Grail shale company’ smartly packages the war chest of data and intelligence they’ve gathered throughout the years from Businesses 1 and 2, and uses it as leverage[13] to bring bigger and bigger clients to the table…
“It’s currently their smallest business, but it’s growing fast.”
And they include a chart of the stock’s movement, which is a nice final bit of confirmation that we can use to double check the answer from the Thinkolator.
So what’s the stock? This is, sez the Mighty Mighty Thinkolator, the $6 billion Dutch oil services company Core Laboratories (CLB).
Which is becoming a more interesting story, to be sure, now that the downdraft in oil stocks has it giving up all of its gains of the last 18 months or so.
Want some confirmation of the Thinkolator’s work? That quote from Mad Money is from October, 2013, when the stock was in the $160s… you can see the clip here[14] if you like.
And the Morningstar quotes are from their analyst, including from this pretty thorough update they shared in June after the stock had taken a hit because of reduced guidance. You can see the analyst report that they shared publicly here[15].
Core is a pretty unique service/technology provider in oil services, and Morningstar says they’ve usually looked expensive because they have a far stronger market position than most and have not had the same amount of cyclicality in their business (despite the recent downturn apparently due, in part, to some disappointing or delayed orders on Gulf of Mexico[16] work). That’s certainly the case today, they’re still trading at a trailing PE of 24 (forward PE of 20) even after the stock has fallen by about a third since peaking in April (at around $220).
So what do you need to know in determining whether or not to buy Core Labs? Well, you’d probably want to read up and understand their business better than I do at this point, but it is a large and well-established business that is in a pretty enviable position — they provide important services, but the cost of their service is not a major part of the cost for their customers (analysis and reservoir assessment can add value, but cost a lot less than moving big oil rigs around, drilling, buying access to land, etc.)… which should mean that their margins are not under a lot of pressure. And indeed, their profit margins have been generally climbing most years over the past decade, so that’s a good indication of a strong business.
And, yes, it has usually been pretty expensive — the trailing PE ratio for Core Laboratories has very rarely been down to 20 or below over the last couple decades (excepting the 2008-2009 crisis, when it did go below 10 for a bit), so on that metric the stock is pretty close to as cheap as it has been in at least three or four years. Return on Equity has likewise been fantastic and growing for several years, which further reinforces the fact that their services have been in demand and that they have good economies of scale to improve margins when revenues rise.
So the quick scan? Looks pretty good. But, of course, it has fallen from $220 to $136 in six months — so something’s wrong. It could easily be that some deepwater projects are going more slowly with the oil price falling and with oil companies consistently saying that they’ll cut back on exploration budgets, and certainly the price of oil has an impact on oil services stocks even if they’re not necessarily directly selling crude, but it could be something else, too.
I’d have to learn a lot more about them to be completely confident, particularly about how unique their service offerings really are (whether someone else could do the work) and what their exposure to deepwater, US shale, and international projects might be, and they are reporting their next quarter in just a week (on October 22), so changes to their guidance could easily move the shares dramatically again.
But a good company that generates this much cash at high margins for a very long time is worth a look when it gets down to a low valuation relative to its history… even if it’s not necessarily falling into the “cheap” pile yet. They have a great balance sheet, have done a bit of buying back stock, and have become a good dividend grower over the last four years (though the current yield is still low at 1.5% or so), so there aren’t a lot of red flags that jump out at me… as long as their revenues don’t fall off a cliff. I didn’t rush out and buy shares after sniffing around the stock today, and I’m already overweight in energy stocks in my portfolio (to my detriment), but I did jot down a note to remind me to check out their earnings release next week and see if I can learn some more about them in the interim.
It’s your money you’re investing, so it’s your call — interested in Core Labs? Let us know with a comment below.
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I purchased three energy stocks: Hydrogen Engine Center, Inc. (HYEG); American Power Groups, Inc. (APGI); and U.S. Geothermal (HTM). I’m about break-even on HYEG and down almost 50 % on APGI and HTM. I think that I need a new hobby.
Like learning about stop losses?
Good company, but perhaps in the energy/oil space other bargains look better . However CLB is going to the watch list :))
Anyone who bought the “Holy Grail” at 200-plus and just checked in on the stock price today must be saying “Holy…(something else). To be fair, Morningstar now puts the “fair value” at 196 and credits them for having the widest moat possible. On the other hand, if WTI goes to $75/bbl and stays there, many of the lesser-funded shale drillers are going to at least curtail spending and some or all of production. This may be baked into CLB’s price already. Or not.
Speaking if the Holy Grail, there are three important questions: 1. What is your quest? 2. What is your favorite color? 3. Where is the bottom for oil?
Red. No blue.
African or European oil?
All I know is what I read online but I read elsewhere today that these shale drillers make money at $50 a barrel?. If true, they’re stil in good shape.
You may want to read businessweek.com article “U.S. Oil Producers May Drill Themselves into Oblivion” 10/13/14. In it they cited that Goldman Sachs estimated in July that U.S. shale producers needed $85/bbl to break even.
There’s a helpful chart in the following link showing the break even price for the different shale basins and co.s in those basins. Click on the chart to enlarge.
Shale Basin Breakeven Prices – Business Insider
http://www.businessinsider.com/shale-basin-breakeven-prices-2014-10?nr_email_referer=1&utm_source=Sailthru&utm_medium=email&utm_term=Markets%20Chart%20Of%20The%20Day&utm_campaign=Post%20Blast%20%28moneygame%29%3A%20Here%20Are%20The%20Breakeven%20Oil%20Prices%20For%20America%27s%20Shale%20Basins&utm_content=COTD
MF have liked this since ~$200/ ~April
The December $125 puts look pretty ripe to sell–waiting for report next week am I.
Would think that SLB is a better bet going forward. And MF was pitching this three weeks ago.
Could be — more diversified, far larger, similar valuation.
Saudi Arabia just slashed the price of their oil, didn’t anyone hear that one? They are also financing huge legal battles to stop fracking here. Does anyone REALLY know how much it costs to get a gallon to the pump?
Very good company,but most can;t afford to invest enough in a $135 stock!
All else being equal, I’d be much happier buying 10 shares of a $135 stock than 100 shares of a $13.50 stock. When I was first starting to invest a very small portfolio, I sometimes bought even just one or two shares of companies like Markel at ~$300. That’s the wonderful thing about discount brokers now, you don’t have to buy round lots (100 shares) unless you’re an options trader.
Travis,
Hmm….For me I prefer to stay with companies below $20 for initial investments. My risk is greater but so is my potential gain. I belong to MF and I have tired of the high price of many of their recommendations. Lets compare one of their more recent; MKL to ATNM for example. MKL closed today at $672.13 so for $6,721.13 I could buy 10 shares. ATNM closed today at $6.92 so for $6,920 I could buy 1,000 shares. I think ATNM has a target around $16 and MKL around $617. If ATNM increases $10 per share my profit is $10,000. If MKL increases $10 per share my profit is $100 (not counting earnings here only share price). For my 10 shares of MKL to profit me $10,000 it would have to increase to $1, 672.13 per share. Which seems more likely? I get it profit is profit and the cheaper the stock the higher the risk. If I had purchased 10 shares of MKL at $300 today my investment would have returned a nice $3,720 plus probably some solid earnings along the way. Anyway many of these expensive high flying stock picks do indeed sometimes seem to have no ceiling (CMG for example) but to me it always seem their best days have passed and I worry about an earnings miss which can really impact the over valued expensive ones.
V/R
Tom
This doesn’t make sense to me. A lower price does not mean a stock is cheaper. AAPL is a lower price than it was pre-split, but it is not “cheaper.”
You say, “If ATNM increases $10 per share my profit is $10,000. If MKL increases $10 per share my profit is $100 (not counting earnings here only share price).”
That’s true, but for ATNM to increase $10, it has to grow 131%. For MKL to increase $10, only has to grow 1.6%. You’re a lot more likely to see a 1.6% return from MKL than a 131% return from ATNM. Even if your estimates are reasonable for these two stocks, this approach can’t be generalized.
Value-wise MKL seems the “cheaper” stock from the two you mention:
With MKL, for every $672.13 stock, you get $511.28 of book value and $264.39 of cash.
With ATNM, for every $6.92 stock, you get $0.16 of book value and $0.52 cash.
Although you could by nearly 100 ATNM for the price of one MKL, you’d be getting a small fraction of the value and a great deal more risk.
Seems to me that with MKL you get much more for your money, and a much better likelihood of impressive returns.
(Figures from Yahoo Finance.)
Well put. Unless you’re an active options trader (and therefore need to trade in 100-share lots) there’s no real need to use “round lots” anymore. That means even buying single shares of stock is fine for most discount brokerage accounts — 10 and 20 years ago I often bought a single share of a higher-priced stock at a time, like Markel or Berkshire or White Mountains or others that I can’t now remember.
Markel is a midcap P&C insurer and ATNM is a small cap biotech stock so there’s obviously no comparison and these are very different kinds of investments, but if you compare Markel at $670 per share and their competitor WR Berkley (WRB) at $50 a share there’s no reason to think that one has more opportunity to double than the other — both are fairly-to-richly valued by historical measures at about 1.3-1.4X book value, both are midcap companies in the $6-9 billion range for market cap, both are very well-respected and well-run, and, if you look back, both have had almost exactly the same long-term performance: WRB has doubled in five years, from $25 to $50 per share; Markel, despite the fact that many folks refused to buy it because it has been over $200 per share for a decade, has also doubled in five years, from $335 to $670 per share.
ATNM absolutely has much greater potential to shoot forward by several hundred percent in a week than does MKL — it also has a far higher risk of what the pros call “permanent capital impairment” (ie, the stock collapses, whether due to science failure or bankruptcy or whatever else, and it’s never coming back)… that’s the nature of small-cap biotech investing, but it doesn’t really have anything to do with whether ATNM is at $1 or $10 or $150 a share or whether you have 10 shares or 100 shares or 10,000 shares. Any stock can lose 100%, but they don’t all have the same likelihood of losing 100%.
Travis, Chris,
Your points are well made. Acknowledge MKL and ATNM are comparing an apple to an orange. My initial thoughts were in reference to MF recommendations which tend to be pretty good very long term, and it is hard to argue with their many successes. Of course ATNM is greater risk and probably so was MKL 20 years ago. Anyway I hardly need much help from MF to research MKL, Apple, Priceline, CMG…..plenty of experts around to help me with those. They are probably the safer, wiser and better consistent bang for your buck. Anyway MF’s hot monthly recommendations lately have tended to be stocks that have already had explosive growth (MKL, CMG,PCLN) and it is just tough for me to invest in them expecting near term rapid growth. As many of us have regret stocks that we sold to soon I certainly understand the sky is often the limit for many of these great companies. I would rather learn of a MKL at $50 than $600 from MF (or anyone) that was really my point more than anything else. I simply enjoy investing in companies below $20 with great potential more than those that have already exploded in growth and yes my risk is also greater. This article was about CLB a MF recommendation and that was what was driving my comments more than anything else. Just tough for me to buy even one share of PCLN at $1,138 per share. Sigh, maybe I should. 🙂
V/R
Tom
I have thought of that but the reinvested shares look better lol. I think its a perception thing. Starting out dirt poor in life get nervous. I still have about 40 shares of XOM. Don’t know why
I feel the same way. I have plenty of other options to get nice growth and dividends. If I own a stock and it gets to $90-100 Great but I usually don’t buy them that high. I’m still watching a few of the rigs companies like Seadrill and Rig . Wonder if they have bottomed? Big dividends a lot of risk?
CLB sounds quite interesting but I don’t have much cash in my portfolio and almost every stock in my portfolio was recommended by one of the Motley Fools or Teeka Tiwary at MTI or the Cheap Investor and my portfolio is down by 23% or so. It makes one think that he should just put his money in a company that sells data on the internet. I mean one’s own company, not someone elses. Of course if you try selling pencils, someone will make a ballpoint pen and destroy your business. Perhaps I should just buy some gold and wait for the dollar to die.
Or maybe you should just buy more dollar, short gold and wait for the latter to die?
I subscribed to some Motley Fool stuff some years ago. To say that I was disappointed would be an understatement. I am sad to hear that you are down at all, Edward, much less 23%. OUCH!! In any case, I have learned NOT to subscribe to anything anymore.
Check out CLB via finance.yahoo.com:
No insider buying, only selling.
Analist opinion: nothing notable
Increase in earnings??? Not impressive.
But who knows…it might come in future
But seriously, SLB and HAL might be safer bet than CLB. I would also bottom fish some TAN. Feeling more comfortable to hold TAN long term than any fossil fuel names. Oil is here to stay, just might be on decline real long term. Time has changed.
Saudi is flooding the market with cheap oil in an attempt to take back the market for themselves. Russia is being forced to sell their oil at a discount due to sanctions. Someone mentioned the shale drillers make a profit at $50 oil. That’s laughable, plus why ride stocks down as margins shrink anyway. Would not be in the energy sector unless you are quite good at dead cat bounces.
I think everyone’s flooding the market at this point — no one is holding back, and when the Saudi’s don’t hold back there’s no discipline at all in OPEC….
Numbers I see repeatedly cited about shale oil in the US are that the Bakken needs at least $60-70 for most of the good producers to make a profit, the Eagle Ford and Permian are generally cheaper so maybe high $50s work there, but I don’t have any expertise on that — there is quite a bit of variability among companies, I expect. It wasn’t that long ago that I remember people saying the oil sands in Canada were viable at $35 a barrel, though costs have sure gone up in the decade (perhaps) since that was true.
Here is the oil extraction costs as per CNBC. They gave a range because each field has a different price per barrel:
Alaska $40
Canada $50-$100
No Dakota $40-$70
Texas $40-$80
Eagle $40-$70
Venezuela $30
Saudi Arabia $10
Brazil $70
Nigeria $20-$40
Thank you everyone and especial thanks to Travis for keeping the trails continue.
CLB has come up again in the MF letter, but this time around it is around 100$, has it bottomed you think ? Is the analysis the same a few months later ?