Home/Blog/Trading Ideas/Oil’s stability has fired up fracking stocks

Oil’s stability has fired up fracking stocks

5 July 2016 in Trading Ideas

While it seems hard to believe that oil was selling for more than $100 a barrel just two years ago, crude’s fall to one-fourth of that price earlier this year also appears as a distant memory.

Oil has now traded in a mostly stable range of $45-$52 a barrel for the past two months, and while the ride from there to here was fraught with energy-company bankruptcies and curtailed production, investors have become increasingly optimistic that the worst may soon be over.

Partly, that’s because the companies themselves are feeling better about things. Last month, Schlumberger (NYSE:SLB) operations president Patrick Schorn told investors that he believed this year’s second quarter could represent “the final approach” to the market bottom.1 That’s not a phrase that screams optimism, and certainly, the company is still projecting some bleak second-quarter figures: drilling should decline 20 percent quarter-over-quarter while production is expected to be down 10 percent.

On the other hand, Schorn noted improving visibility in North America, with the rig count expected to increase for the next two-quarters. Meanwhile, he said the company’s outlook for its international market remains challenging particularly for Latin America, while the Middle East and Russia were “more resilient.”

It was no small thing, then, when news broke last month that Venezuela’s state oil company, PDVSA, was close to reaching deals to boost Schlumberger’s presence after the oilfield services provider said in April it would reduce operations because of payment problems.2

PDVSA has more than $20 billion in outstanding bills to providers, which has led some companies to slow work. The company’s access to hard currency has tumbled along with the price of oil, and Venezuela is struggling with triple-digit inflation, a severe recession, and heavy bond payments this year and next.

US oil services provider Halliburton (NYSE:HAL)also said in April it would begin curtailing activity in Venezuela, and, lo and behold, signed a similar financing agreement with PDVSA late last week.3 Another was just signed with rival Weatherford International (NYSE:WFT)

Those deals steadying the revenue streams of the respective companies have dovetailed nicely with the recent new era of less-volatile oil prices. That’s helped the stocks of oilfield service companies that are otherwise waiting for a true renaissance in fracking production in the US and elsewhere.

The Frack Attack motif has increased 9.3 percent in the past month. In that same time frame, the S&P 500 has slipped 0.1 percent.

In the past 12 months, the motif is down 16.2 percent; the S&P 500 is up 1.3 percent.

Longer term, as drilling shows more signs of a recovery, some analysts like the oilfield services sector even more. Susquehanna analyst Charles Minervino recently raised his price target on Halliburton to $55 (it was $44 at the time), saying he believes the company is well-positioned to take advantage of trends in the energy industry in the coming years.4

Minervino said that Halliburton expects some small pickups in well completions activity and some rigs going back to work in pockets of the southern US if oil can stabilize at $50-$55 a barrel, but that it would take $60-$65 a barrel prices to spur a broader and more material recovery in spending. In addition, since the utilization rate of Halliburton’s existing US equipment in the field is still only around 50%, higher utilization of pressure pumping trucks would require very little incremental operating expense, Minervino wrote, which could result in incremental margins in the US being as high as 60% in the early stages of a cycle recovery.

After a tough year for oil-related investments, mounting evidence of an imminent bottom and a brighter future has been enough to get many traders back on board.

Related motif: Frack Attack


Investing in securities involves risks, you should be aware of prior to making an investment decision, including the possible loss of principal. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector. Investments in ETFs can include those with a narrow or targeted investment strategy and can be subject to similar sector risks than more broadly diversified investments. Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.

International investments involve additional risks you should be aware of, which include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, news that can trigger volatile conditions, and the potential for illiquid markets.

Investments in commodity-related products, such as precious metals, agricultural products, and oil may be subject to greater volatility and liquidity risks than investments in traditional securities. Commodity-related products can be significantly impacted by underlying commodity prices, world events, government regulations, and economic conditions, which can dramatically affect the value of an investment.


1Ben Levisohn, “Schlumberger: Houston, We Have a Bottom?” barrons.com, June 21, 2016.

2Alexandra Ulmer, “Venezuela PDVSA near deals to boost Schlumberger presence — executive,” reuters.com, June 11, 2016, http://www.reuters.com/article/venezuela-oil-idUSL1N1930G5, (accessed July 2, 2016).

3Eyanir Chinea and Brian Ellsworth, “Venezuela’s PDVSA signs financing deals with Weatherford, Halliburton,” reuters.com, June 30, 2016, http://www.reuters.com/article/us-venezuela-pdvsa-idUSKCN0ZF2V6, (accessed July 2, 2016).

4Teresa Rivas, “Halliburton Well Positioned for Oil Recovery: Susquehanna,” barrons.com, June 10, 2016.