The one way you can tell oil and natural gas companies are doing somewhat better is by looking at the increased activity within the sector.
Some of the news is good, some bad. But the velocity of change is what’s important.
Recently, General Electric (NYSE: GE) and Baker Hughes (NYSE: BH) agreed to merge for around $30 billion. That is a huge move to consolidate the oil-field-services sector. Right now, Schlumberger (NYSE: SLB) is the big kahuna with a revenue book valued at $35 billion.
GE sees an opportunity to combine with Baker Hughes while the latter is floundering and build a services company that can compete with Schlumberger.
Bear in mind, Schlumberger recently reported that Q3 income was off 82 percent. And the sector is supposed to be in recovery. GE sees opportunity. And it could well be putting a bottom into this energy market.
While the rest of the oil patch is still full of more bad news than good — ExxonMobil reported Q3 earnings were off 38 percent; industrial metals and commodities miner Freeport MacMoRan sells off its onshore California oil assets for $742 million to get some income going; the EIA (US Energy Information Administration) predicts lower shale oil and gas production in November; Statoil is cutting $1 billion from its capex budget for FY2016; Saudi Arabia talks about productions cuts; Russia threatens to ramp up production.
This is all what’s happened in the past four weeks.
That’s a lot of motion.
And it’s not showing a pattern but the increase in activity means that the sector is ripe for mergers, consolidation and generally preparing for the next leg up in oil and natural gas prices.
So far, the winter in the Northeast doesn’t look like it will draw too much on fuel supplies, but it’s still early on.
Saudi Arabia is also stuck in a costly war with Yemen as well as spending heavily in Syria. Low prices have run The Kingdom’s coffers down so low that the Saudis are organizing an IPO for the state-run oil company Saudi Aramco.
Estimates put the sale value around a record trouncing $2-3 trillion and generate $1 billion in fees.
The Saudis are hoping to use the money to diversify their industrial base and pay off some of the debts they have built up over the past few years. They can also pay off the restive Shia minority in the south that are gaining momentum in their fight to topple the government.
Russia is in a recession brought about by sanctions for its actions in Crimea and Ukraine as well as the drop in oil prices. Spending on military efforts in Syria aren’t helping either.
In the U.S., this is a slow season, unless there’s a significantly colder winter ahead and given the earnings coming in, there’s not much growth in the U.S. economy. The recent 2.3 percent GDP number was joyfully welcomed, but no one thought to mention how sad it is sub-3 percent growth is a cause for celebration.
With all this maneuvering, I would say the one clear winner is GE. I like it for a number of reasons — it’s been in business more than a century, it is re-focusing on its industrial base, it is making smart strategic moves in its business sectors, to name a few.
The big oils will be the next set of stocks that will likely start to become attractive. But we have to put a bottom in first. And we have yet to see that happen.
As for precious metals like silver and gold, they’re at good prices now but, as an investment, don’t expect too much action from them until the Fed decides whether it will raise rates in December. A rate rise will bring prices down even lower short term, and that’s the place to back up the truck.
— GS Early