This column was originally published on RealMoney on July 22 at 1:00 p.m. EDT.
In the oil patch today, what's not to like?
The two heavy hitters,
knocked the cover off the ball with second-quarter numbers, and the outlook for the two companies is even better. When Andrew Gould, Schlumberger's CEO, was asked what worries him, there was a long pause and all he could think of was the impact of hurricanes.
It doesn't get much better than that. Yet my contrarian bent -- especially with the oilfield service names, as measured by the Oil Service Index (OSX), running over 4% in midday trading -- tells me I need to start thinking about the duration and the magnitude of the run from here.
Please don't think I'm turning bearish on energy or think this energy cycle is close to over. I don't. In fact, Gould said exactly what we've discussed here for months: Too few investors and pundits are mindful of the anemic supply response to the increase in drilling and exploration. Doubling the number of rigs drilling for natural gas in North America has barely moved the needle on production. And in Saudi Arabia, Saudi Aramco has made little progress in boosting production even after nearly doubling the rigs working its major oil fields.
That is a compelling argument that suggests we need even more rigs, deeper wells and newer technologies that push us to the next stage in energy exploration. With a very smart energy investor at dinner last night, we were bemoaning the fact that there have been very few "step function" changes in the energy exploration process over the past 20 years. While advances in electric motors, top drives and the quality of drill bits -- to name a few items -- have helped, what has really changed to improve the way we drill for oil and gas? The answer: very little.
As a result, we just have to do what we have done for the last two decades faster and with more volume to keep up. In a nutshell, that's why these stocks still work.
Sure, it's hard to see anyone getting much more sanguine on the cycle than the comments from Schlumberger and Halliburton this morning. But similar reports from the 10-plus companies that report next week -- from
-- are likely to tell very similar stories about strength in the oil patch.
I'll take that optimism compared with
for a trade, at least in the coming week.
Have a great weekend.
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Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback;
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