Now, however, with falling oil and gas prices, some believe the boom may be over. Indeed, over the past three months, the energy sector has been one of the worst-performing stock groups, posting only negligible gains.
But rumors of Energy's demise may be exaggerated. Indeed, a new boom may be on the horizon. Let's see where it might be best to invest.
Image source: Getty Images.
There has been no drop in demand for oil and gas, and it could be argued that, particularly given the ongoing war in Ukraine, it may even increase. The invasion certainly prompted nations to prioritize energy security, which is encouraging new investment. However, supplies remain scarce, and with China reopening its economy, demand could skyrocket.
While some of these events, like war, are more of an immediate concern than indicative of a long-term trend, there is still an inexorable movement toward growth. This means that large integrated oil and gas companies, such as ExxonMobil AND currencies can benefit, as well as intermediate players like Enterprise Product Partners.
However, I think the best opportunities lie with the companies that sell the picks and shovels to these players—the stockpiles of equipment and services that keep the industry moving. Industry titans like Schlumberger (SLB -0.87%) and Halliburton (HAL -1,17%) might just be the best way to play the next boom.
Helping others help themselves
The oil and gas services sector had a prosperous 2022, with Schlumberger, providing essential equipment and technology, such as drilling rigs and software, to companies that use them to extract oil and gas from the ground, enjoying 25% in service revenues. Halliburton, a leading provider of hydraulic fracturing services, reported an increase of 33%. Operating earnings for each increased 80% and 77%, respectively, with operating margins increasing year-over-year.
On the other hand, the third largest player, Baker Hugheshad more modest results with revenue growth of 8% and an increase of 15% in operating profit.
Executives from oil and gas services giants expect the good times to continue. Schlumberger CEO Olivier Le Peuch said: "Looking ahead, we believe the macro backdrop and market fundamentals supporting a strong multi-year growth cycle for energy remain very attractive in both oil and gas and low-carbon energy resources.
This was reiterated by Halliburton CEO Jeff Miller, who said: "It's clear to me that oil and gas supply is tight, and only many years of increased investment to stem the decline and increase reserves will address the supply shortage. I believe these investments will help drive demand for oilfield services for years to come."
The boom is coming
Even with the prospect of recession in some markets, demand is expected to grow by 1.9 million bpd this year, to a record 101.7 million bpd, according to the International Energy Agency. Most of this is expected to come from China, which will likely account for half of all demand when it reopens after severe COVID lockdowns in major cities last year.
At the same time, however, growth in global oil supply is expected to slow to 1 million barrels per day, with the United States being the main source of this growth, although it will not be enough to offset the drop in production by OPEC - producing nations.
Why this market dynamic will spur new drilling activity Schlumberger says it will be able to flex its pricing power as onshore drilling and offshore activity increases, particularly in the Gulf of Mexico, where services have a significant presence.
Halliburton also expects increased activity and spending on wells, or wells drilled to aid oil and gas exploration and recovery, with most of the new activity coming from the Middle East and Latin America. This is perfectly acceptable, since half of Halliburton's revenue comes from international markets.
Image source: Getty Images.
Willing to share the wealth
Wall Street also appears optimistic. Analysts expect both companies' earnings to grow at a compound annual rate of more than 40% over the next five years. And Schlumberger and Halliburton are willing to share their generosity with shareholders, with the two utilities recently increasing their dividends by 43% and 33%, respectively.
Although Schlumberger has made continuous payments to investors since 1957, its record of increases has been erratic. It increased its dividend on 40% last year, but cut its payment in 2020 amid the COVID outbreak; it hadn't increased it since 2015. Today, the payout yields a modest 1.3% per year.
Halliburton has been paying dividends consistently since 1972 and raised it 167% last year, but that was also followed by a cut in 2020. Halliburton's previous dividend increase was in 2014. Its dividend yields 1.2% annually.
Both companies, however, expect to return at least 50% of free cash flow to shareholders in the form of dividends and share buybacks next year.
Ready to Go Set!
The tailwind behind the energy sector is stronger than any potential headwind, and even if a recession emerges, the need and demand for oil and gas will replace it.
The world's years of underinvesting in manufacturing as an economy didn't always make sense, but now there's a growth hangover that can't be ignored. Therefore, investing in companies that will help the oil and gas industry reach its production targets may be the best bet investors make this year.
Rich Duprey holds positions at Chevron and Exxon Mobil. The Motley Fool recommends Corporate Product Partners. The Motley Fool has a disclosure policy.
