As energy demand continues to increase and oil and gas production ramps back up, market conditions are ripe for oil and gas service companies. With its growing revenue, niche focus and smart acquisition strategy USOG is ideally positioned to benefit from the significant upside we see in the oil and gas distribution and services sector near term.
With crude prices hovering around the $70 per barrel range, even with reduced demand, oilfield services remains one of the more promising sectors still with room to grow. (Seeking Alpha, “Oilfield Sector Shows More Promise”, September 2009)
The rig count is rising again, still off of its record 2008 highs but gaining steadily. The October 31, 2009 Baker Hughes Rig Count reports the number of rotary rigs actively exploring and producing nationwide rose by 60 in October to reach 1069. The rig count for September 2009 was 1009, up 29 from the 980 counted in August. While still well below the 2,014 counted in September 2008, producers have begun ramping up drilling activity in anticipation of better prices.
In Kansas, where USOG subsidiary Turnbull Oil operates, Independent Oil & Gas Service reports the rotary rig count has climbed nearly 75% since April 2009 to reach 71.
The US Department of Energy projects world marketed energy consumption will increase 44% by 2030, according to its International Energy Outlook 2009 report published in May by the Energy Information Administration (EIA). The report asserts that while the current economic downturn dampens world demand for energy in the near term, most nations will begin to return to trend growth within the next 12 to 24 months. Fossil fuels (liquid fuels and other petroleum, natural gas, and coal) are expected to continue supplying much of the energy used worldwide.
The EIA’s International Energy Outlook 2009 projects the price of light sweet crude oil in the United States (in real 2007 dollars) will rise from $61 per barrel in 2009 to $110 per barrel in 2015 and $130 per barrel in 2030. With oil prices rebounding and continuing to rise, consumers are also expected to choose less expensive (and cleaner burning) natural gas to meet their energy needs whenever possible, particularly in the industrial sector, where, for example, newly constructed petrochemical plants are expected to rely increasingly on natural gas as a feedstock.
If you're betting on the return of high gas and oil prices or even the return of historically reasonable prices, you're going to get a big move sector wide in oil service (The Street, “Baker Hughes Could Break Out”, October 8, 2009). The majors in this sector are Schlumberger (SLB) with a $65 billion market cap, Halliburton (HAL) with a $21 billion market cap, and Baker Hughes International (BHI) with a $10.5 billion market cap.