(Bloomberg Gadfly) -- Donald Trump had a habit of ending his campaign rallies with the Rolling Stones’s “You Can’t Always Get What You Want.” Someday we’ll all understand why. One slice of America to which the lyric certainly didn’t apply, however, is the oil and gas business.
This year, Christmas came before Thanksgiving in the oil patch -- and not merely because a fossil-fuel-friendly president was elected on November 8.
Gifts have arrived from overseas, too; first in the form of a sudden reversal in Saudi Arabian policy leading to an OPEC agreement to cut supply, and then this weekend’s announcement that 11 other countries would join in. After Monday’s surge, crude oil is now about $53 a barrel, the highest since July 2015.
Want to join in the festivities? The most obvious way is to buy the stocks of exploration and production companies, perhaps a basket like the SPDR S&P Oil & Gas Exploration and production ETF.
Oil services stocks might be a better alternative, though.
OPEC’s spirit may be willing for supply cuts, but its flesh has often proven weak. The addition of a non-OPEC coalition bolsters credibility somewhat. Yet, as Morgan Stanley points out in a report published on Monday, compared to its existing forecasts, the non-OPEC cuts actually would take an incremental 190,000 barrels a day off the market next year, rather than the headline 558,000. Saudi Arabia’s Oil Minister felt it necessary to say his country might cut supply even further, if need be, which can be read equally as both resolve and and a lack of faith.
Moreover, the president-elect’s apparent fondness for fracking, while a boon to a suffering E&P industry, is actually bearish for prices. Relaxing regulations and approving pipelines translate into lower costs for E&P firms, reducing their breakeven prices and, all else equal, making currently marginal prospects more viable.
Taken together, these two treats will tend to counteract each other, with more American barrels showing up faster to help offset some missing ones elsewhere. This tension, and the risks around those supply cuts materializing in full, could make for choppy oil prices in 2017. We likely won’t know for a good six months or so.
That's just fine for oilfield-services firms. Drilling activity and hiring trends in the oil-patch were stabilizing even before November’s revelations.
In the third quarter, the 59 E&P companies tracked by Bob Brackett, an analyst at Sanford C. Bernstein, didn’t outspend their overall cashflow for the first time since late 2011. The oil crash finally got them to break their spending habit.
The recent jump in oil (and natural gas) prices – based largely on sentiment at this point – tees up a potential resumption. Average 2017 futures have risen by about $8 a barrel, or 16 percent. It is clear from what’s happened to positioning in oil futures that some E&P firms have taken the opportunity to lock in higher cash flows from tomorrow’s output.
Here’s guessing any extra cash isn't destined for a special dividend.
Instead, among the initial recipients will be contractors supplying the people, equipment and services necessary for more drilling. In its latest survey of spending plans by E&P companies around the globe, Evercore ISI projects a 25 percent increase in 2017 within the U.S.
While E&P companies will be reluctant to hand over any increases in oil revenue to contractors at the expense of their own margins, services companies have been taking it on the chin for a while and should snare some of the gains for themselves. This has been seen already in wage trends since the summer.
It can also be seen in prices for sand, used in ever bigger quantities to extract more oil and gas from fracking, and the stocks of suppliers such as Fairmount Santrol Holdings Inc.
Companies helping E&P firms complete existing wells, such as Superior Energy Services Inc., may see further improvements in the oversupplied market for pressure-pumping equipment (used in fracking).
Suppliers of specialized steel for the oil business, such as Tenaris SA, may also see better demand.
Would a renewed increase in oil production from U.S. shale ultimately work against the optimism buoying the market? Yes. In the meantime, though, suffering oil contractors can at least get some of what they need.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.