The Next Big Winners in Trump’s Oil Rally
There are many winners from the presidential election…
U.S. energy companies are already tapping into gains. But man oh man. That’s nothing compared to the profit power-up that’s coming.
Sure, these companies are also profiting from OPEC production cuts. But don’t underestimate the “bang!” they’re going to get from Trump’s heat-seeking efforts to boost jobs and American business.
Still, not all energy companies are created equally. Some win… some win big. Let me show you what I mean…
The U.S. benchmark oil price was recently up 18.5% since the election. Large cap oil producers, as tracked by the Energy Select Sector SPDR (NYSE: XLE), are up 8.9% at the same time. This is only slightly better than the S&P 500’s 8.2% gain.
Now check out the performance in oil field services. Its 24.6% performance blows away the rest of the pack.
So what’s going on?
It’s a convergence of forces. Again, OPEC’s decision to lower production plays a part. But there are other forces that are particular to America. And one of those is Trump.
Even better, this is a trend that should heighten in 2017. And that will provide the potential for windfall profits in select stocks.
Dropkicked Into Action
Let’s start with a good ol’ kick in the pants. When oil prices cratered in 2014, many companies were thrown for a loop. Suddenly, in some fields, it was just not worth the effort to drill holes that cost you more than the oil you got out of it.
Not only was it not worth pumping some oil – it wasn’t worth looking for it. Oil exploration spending fell from $100 billion in 2014 to about $40 billion in 2016.
With no one looking for oil, the amount of new oil discovered also cratered. Last year, it fell to the lowest level since 1952. Ugh!
This is important, and I’ll come back to it. First, let’s talk about what else low oil prices did. They made drillers and service companies geniuses at lowering the cost of drilling.
These companies learned to squeeze more oil out of every square foot of rock through fracking. Horizontal drilling extended the area that one hole could tap. Automation and new technology, including nanotechnology, made drilling faster.
Result: Costs went way down.
Many oil field services companies entered 2014 burdened by high debts. They went bankrupt. Other companies with more cash picked up the equipment for a song and kept perfecting their techniques.
Lean, Mean Profit Machines
And that means there are fewer oil field services companies today. Sure, some dogs are still around. But the true survivors are lean, mean profit machines.
And now, thanks to higher oil prices, the big oil producers want to hire those drillers again. Especially because they hardly did any exploration for two years (see my previous chart).
That’s one reason the big oil companies are seeing their stocks under pressure. They haven’t expanded their reserves during the tough times. They need to hire more drillers.
But now, after the price-shock carnage, there is a smaller pool of talent. That means prices – and profits – go higher.
Now let’s get to Trump. I have talked about how he boosts gold and miners. The same ideas extend to energy, too.
Trump Rewrites the Rules
First, Trump is slashing regulations. His administration plans to roll back rules on methane emissions from oil and gas operations. He also plans to ease regulations on fracking and offshore drilling. This lowers costs for drillers, thereby raising profits.
Trump just jump-started two stalled projects, the Keystone XL pipeline and the Dakota Access pipeline. This was a signal to the industry that the days of regulatory pushback are over.
At the same time, the White House is also considering easing restrictions on drilling on federal lands. This means more drilling, which means more work for oil services companies.
You can see how this will boost drilling and production. And U.S. production is already rising, hitting 8.94 million barrels per day recently. That’s up more than 500,000 bpd since July.
Winners From the Trump Oil Revolution
Oil explorers and services companies will be big winners. But high-cost producers that haven’t been able to cut the mustard even with recent oil prices will also benefit. Refiners will also reap a whirlwind of profits, as will companies that supply pipes and other equipment.
The bottom line is that 2017 is shaping up to be a great year for the energy sector. We should see higher prices and profits generally. And there will be some extraordinary opportunities.
P.S. On Thursday, I’ll be giving a special webinar on gold, silver and more with the Korelin Economics Report. Host Cory Fleck and I will dive deep into the forces lining up to shift gold into overdrive. I’ll tell you how Trump could be the wild card in the precious metals markets. And I’ll tell you my latest picks – the hottest producers and explorers that are highly leveraged to the metals.
This is the launch pad you need to protect your wealth and grow your profits in 2017 and beyond. So tune in at 3 p.m. ET by clicking here. Get those red-hot picks before the market wakes up to the next rip-roaring surge in resources!