ELAM: Energy service breaks out
Good tidings of Great Joy, not the Christmas kind but the Permian Basin Energy Service kind. Energy service stocks are breaking out of sideways formations in what appears to be a sustainable rally. Let’s take a look.
XES is the energy service ETF. It includes a representative sample of service firms of course including Schlumberger (SLB) and Halliburton (HAL) as well as my two picks. XES peaked around $98 in July. It then fell to the double bottom at $76 during September and early this month. It has now launched a rally taking it to $87. Yes similar action is taking place in the energy ETF which is XLE. I am however recommending the service stocks as they generally outperform in an energy rally.
And yes, more good tidings, the price of oil bottomed last Friday and has rallied every day this week. The low for January 2025 was $68.56. West Texas Intermediate Crude (WTIC) is up a dollar today (Friday) at $71.12. It needs to surpass the earlier high this month of $72. But momentum looks like that will happen. That prediction is backed up by the performance of energy and service shares.
Now to my suggestions. Yes XES offers broad diversification but at 87 bucks it is a bit pricey. My first pick listed here weeks ago is Transocean (RIG). RIG owns the largest fleet of offshore drilling units in the world. When demand is high, these can rent for hundreds of thousands a day. It is trading for 38% of book value. One is buying the company at thirty-eight cents on the dollar for what RIG paid for its own equipment. RIG reports several billion dollars of forward sales. As demand for rigs increases (drill, baby, drill) RIG will be able to raise prices. Buy it today for $4.50.
Patterson (PTEN) has three divisions. Drilling service offers contract onshore oil and natural gas wells. Completion services offers fracturing, wireline and pumping completion, cementing, and natural gas fueling and logistics and storage business. Drilling products manufactures drill bits and data analytics technology. Buy it today for $8.82. It is trading at 90% of book value. One is buying the company for less than it paid for its own equipment.
One can buy a lot more RIG and PTEN at these prices than XLE or XES trading at ten times those amounts. All of the above is an indication that basic commodities like oil, natural gas, gold, and silver will be the next investing boom. Get in now while everyone is still eyeing NVDA and its sky high valuation.
Attempts to call a top in the overall stock market have proved futile. Dow Industrials, SPX, and NDX all look like they will take out their previous November highs this December. Next week is Thanksgiving and trading usually slows in a holiday week.