The next frontier of the oil and gas industry isn’t just fracking, but deep-water fracking. Here’s how to play this growing industry.
We are in a modern day oil boom and that means nothing is off limits.
Offshore drilling has lured a lot of the major oil and gas companies to pursue profits in the deep waters of the largest oceans around the world.
But there is a new trend is on the rise – Offshore Hydraulic Fracturing.
This practice, more commonly known as fracking, is moving from onshore to offshore. That’s right — the new trend of fracking is offshore fracking. This process involves creating fractures in rocks that lie deep under the ocean to allow oil and gas to flow more freely into wells.
Offshore fracking is nothing new, as it has been around for several years, but the recent developments in technology is making it a more viable option.
Fracking some of the world’s biggest offshore wells will cost serious money, involving huge rock crushers and millions of tons of sand to hold these cracks open. This endeavor will prove to be a very profitable market for those companies that can make the process easier.
Enter two of the world’s largest oil and gas equipment and service companies:
No. 1 Way to Profit from Offshore Fracking: Schlumberger (NYSE: SLB)
Schlumberger is the largest oil and gas equipment company by market cap. It caters to some of the largest oil and gas companies in the world, including Chevron (NYSE: CVX) and ExxonMobil(NYSE: XOM).
In a way, these oil and gas equipment companies are like technology companies, with innovation being a big part of their businesses. Last year, Schlumberger spent 2.5% of its revenues on research to develop a number of new products for fracking. These include improved versions of drill bits that last 25% longer than conventional bits.
Schlumberger does get around 5% of its revenues from Russia, where the step up in sanctions has frightened some investors, but its key growth markets are within regions of Africa and the Middle East.
No. 2 Way to Profit from Offshore Fracking: Halliburton (NYSE: HAL)
Halliburton has a market cap that’s roughly a third of Schlumberger’s. Halliburton was responsible for cementing the well involved in the Deepwater Horizon incident and has traded as low as $23 following the explosion.
But thanks to its contract with BP (NYSE: BP), Halliburton was indemnified from a major loss. Last year, the Department of Justice closed its investigation of Halliburton and its stock is now up near all-time highs.
But how do investors pick a winner?
Schlumberger is much more of an international play, generating just 30% of its revenues from North America. Halliburton generates right around half of its revenues from North America and gets around 65% of its operating income from North America. It is also in one of the best positions to capitalize on the Gulf of Mexico.
Fracking is already taking place off the coasts of Brazil and Africa. But the big play is the Gulf of Mexico, where fracking will grow by over 10% through 2015.
Both of these companies have impressive balance sheets. You don’t have to worry about major debt burdens and their cash flow generating capabilities are unrivaled. For example, Schlumberger generates as much free cash flow as Google.
They also offer dividends — Schlumberger pays a 1.5% dividend yield and Halliburton’s yield is 0.9% and the dividend payout ratio is less than 30% for each company. It wouldn’t be unreasonable to own both these stocks.
Schlumberger has the higher profit margin and lower debt-to-equity ratio. But digging deeper, Halliburton is indeed the better valuation play as it trades at a forward P/E (price-to-earnings ratio based on next year’s earnings estimates) of 12.7, compared to Schlumberger’s 15.9.
Factor in Wall Street’s growth expectations and Halliburton’s story gets even better as its P/E-to-growth rate (PEG) ratio is right at 1, while Schlumberger is at 1.25.
The oil and gas equipment industry as a whole trades at an average P/E of 26. By this measure, both stocks are enticing investments.
Offshore fracking will likely raise concerns, but there’s no reason to believe it won’t have the same success as onshore fracking. For investors who are willing to put their emotions aside and invest for profits, this could turn out to be a lucrative opportunity.
Deepwater Drilling for Dividends
Discover a company that’s drilling into the largest oil reserve in the Western Hemisphere…deep under the Atlantic Ocean. With every barrel of crude oil that it unearths is adds to the massive dividends that it pays its savvy investors. This is the only company that has the high-tech rigs and the sole rights to drill the “Saudi Arabia of the Sea.” And the best thing is…It’s paying out bigger dividend than Exxon and BP. It’s highly profitable and rewards shareholders with unannounced “bonus” dividends. And it pays them out every quarter. That’s on top of its regular, scheduled dividends — meaning shareholders are collecting 8 dividend payments a year, all from this one investment.