If you are as bullish as I am about the energy sector, it makes sense to buy stock in companies throughout the entire value chain. The means buying stakes in upstream, midstream, downstream, and (we can’t forget) oil field services. Below, I review two stocks in different industries within the energy sector. My focus is on analyzing their strengths and weaknesses to assist the reader in making an informed investment decision.
Opportunities & Risks for Halliburton Company (NYSE:HAL)
Despite challenges from volatile guar gum prices and overcapacity in domestic driller, there exists a multitude of opportunities for Halliburton. The first one has essentially consistently been boosting its dividend distribution over more than the last six decades, and this is not expected to change any time soon. It is also encouraging to see that earnings per rig has been rising, even in North America. In 2008, the company earned $3.69 million for each rig, and this figure has since changed to $6.46 million.
Halliburton has had several strategic acquisitions, all of which were aimed at improving the product portfolio to provide a full suite of compelling services to upstream producers. A recent example of a strategic acquisition by this company is the buyout of Petris Technology Incorporated. This firm provides innovative solutions that help oil & gas companies optimally manage reservoirs. It will be particularly helpful for Chinese energy companies that are seeking to tap into their country’s rich proven reserves of shale gas. Halliburton has a leading expertise of fracking in the United States and thus is an optimal partner for emerging market players. It has experience in all of the known major sites.
Despite these opportunities Halliburton faces some threats. The first threat is the fierce competition that exists among oil field service companies. All the companies in the industry are pushing to pass on lower costs, which has devastated margins at a time when basins are being crowded and natural gas prices are low. Further, the company is exposed to unfavorable government regulations that can negatively affect the expansion of the company. I would argue, however, that much of the downside has been factored into the stock price, since Marcellus Shale production, for example, is only likely to go up from fracking bans being lifted.
Why You Should Buy Suncor Energy Inc. (USA) (NYSE:SU)
Suncor is a Canadian company specialized on the oil sands, which is facing pressure from excess supply. Management has helped reduce risk by providing a generous capital allocation policy. By the third quarter of 2012, the company had managed to repurchase shares worth $1.5 billion. Shortly after, the company announced that it was going to start another share repurchase program worth $1 billion. Dividends increased by 18% per share, and there is the expectations for more increases in the future.