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Why These Few Oil Stocks Have Huge Upside in 2011
Written by Sierra Hancock Subject: Energy
Why These Few Oil Stocks Have Huge Upside in 2011
Wall Street is warming up to oil stocks again.
Over the past month, analysts have been upgrading industry giants
like BP and Royal Dutch Shell. And these companies are raising their
earnings estimates and target prices.
The move makes sense. Demand for oil from emerging markets like
China and India is skyrocketing. On the supply end, it's more difficult
than ever to find new deposits. Huge demand coupled with depleting
supply has helped push oil up 25% over the past four months...

I have no idea where oil prices are going. What I do know is that
OPEC is projecting exploration and production companies will increase
capital expenditures ("cap-ex") by 11% this year. That amounts to almost $500 billion for 2011.
Cap-ex is the amount of cash oil companies will spend to increase
reserves. In other words, this money will be spent on new oil
exploration projects. And OPEC said most of this capital will be used to
fund projects outside the U.S.
Based on the enormous amount of cash that will be spent on new
projects – and to upgrade existing oil projects – buying the oil
services companies is a no-brainer. These are the guys that provide the
"picks and shovels" for companies like ExxonMobil, BP, and Chevron.
Below is a list of four oil services companies that should be major
beneficiaries. I've provided the market cap, forward price-to-earnings
ratio, and projected sales growth. I also added the percent of revenue
earned outside of the U.S. – since that's where most of the cap-ex money
will be spent.
Company |
Forward P/E |
2011 EPS Growth |
% Revenue Outside
the U.S. |
Schlumberger (SLB) |
21 |
36% |
83% |
Halliburton (HAL) |
14 |
37% |
64% |
Baker Hughes (BHI) |
17 |
60% |
68% |
Weatherford (WFT) |
18 |
117% |
69% |
Each of these companies is expected to grow earnings at more than
35% in 2011. But based on the table, the best values are Halliburton,
Weatherford, and Baker Hughes. These companies are trading at the
cheapest levels relative to their projected earnings growth.
Schlumberger has the most exposure to oil service projects outside the
U.S.
My advice is to wait before purchasing any of these stocks. Over
the next few weeks, each will report quarterly earnings. During earnings
season, it's common to see stocks pull back, even after reporting good
news. Also, with sentiment levels near three-year highs, we're likely to
see a short-term drop in the market following this huge run higher.
If these companies sell off over the next few weeks, I wouldn't
wait long to buy. Oil services companies with exposure outside the U.S.
are about to see tens of billions of dollars in new orders over the next
12 months.
Good investing,
Frank Curzio
Further Reading:
In the late '90s, China's "Google" scored enormous
gains for its investors. With increasing Westernization, Frank forecasts
similar gains in China's answer to YouTube and Amazon. Make sure to add
these stocks to your watch list. Get the details here: How to Buy the Next Baidu.
Matt Badiali shares four small oil and gas companies that could net
you triple-digit gains over the next five years. "The secret," he says,
"is to focus on relentless reserve growth." Read more here: The Secret to Making 20-Fold Gains in Oil and Gas.