U.S oil and gas business in a renaissance
By Mitchell Clark, B.Comm. for Profit Confidential
The stock market’s recent breakout has legs, and there’s more optimism for the economy and corporate earnings this year. The stock market had a very strong start to the year, with the Dow Jones Industrials leading the way. Transportation stocks have turned strong, and the NASDAQ Composite is moving solidly. Even the price of oil is slowly ticking higher—$100.00 oil is a near-term reality.
There is a renaissance taking place in the domestic U.S. oil and gas business, and there is a ton of money sloshing around in the system. Countless companies are drilling in Montana, North Dakota, and California, along with the traditional regions. There is a glut of natural gas on the market, and low prices are supplanting coal for electricity production. It won’t be long before the U.S. is actually energy independent, especially if natural gas is used in more applications (as T. Boone Pickens advocates). Plus, there’s a lot of oil and gas drilling going on outside of the U.S. market, and the big oil and gas services companies just reported great financial results.
On the stock market, resource investing is always cyclical. Even the fastest growth story (say, an oil producer with new discoveries and a verifiable production forecast) won’t move upward on the stock market without a commensurate move in oil prices. An oil producer not only has to find the commodity and get it to market; it also has to worry about the prices for that commodity, which are set by a marketplace beyond its control. It’s a different business from speculating among technology stocks, for example.
That being said, however, if oil prices are rising, and there’s a good growth story out there, the stock market will reward that story with particular fervor. Because the commodity is so much a part of our daily lives, oil stocks, especially, move on the stock market with greater strength over other resource stocks.
There are a lot of new growth stories in the oil business these days. One smaller producer with seemingly good prospects is Northern Oil and Gas, Inc. (NYSE/NOG), which is a Minnesota company drilling and producing in the Bakken and Three Forks formations in the Williston Basin in North Dakota and Montana. This is one of many newly popular oil regions in the U.S.
In 2012, the company’s total revenues were about $300 million. In 2011, they were $160 million; in 2010, they were $60.0 million; and in 2009, they were $15.0 million. This is, for sure, a growth story; but on the stock market, the position was down for almost all of 2012. The reason, of course, was flat oil prices.
So, here is the key: when oil prices turn higher, there will be a lot of stock market strength from this group. Timing, of course, is everything. I think we’re very close to a breakout in oil prices. Natural gas is another story. But the U.S. economy should grow between two percent and four percent this year, and if the current momentum sustains itself (and policymakers don’t create more uncertainty), then gross domestic product (GDP) growth is going to put pressure on oil prices. (See “My Near-Term Outlook for the Stock Market as We Start 2013.”)
Right now, I’d be perusing growth stories in the oil business on the stock market. Strength in large-cap oil companies is self-evident. Many of the big names are trading right around their all-time highs. China is also a player in this story, and the economic news from that country is turning positive. The U.S. oil business is experiencing renewed enthusiasm. There are going to be more jobs in this industry over the next several years.
Contributed by Profit Confidential