CNBC's Kate Kelly asked me last January if I was worried about smaller players in the energy sector "just plain going out of business."
I replied that not only was I not afraid of the weaker players being swept away, I was counting on it.
As you might imagine, that raised more than a few eyebrows, considering oil had fallen by 51% from last summer's highs to only $52/barrel at the time, and investors couldn't hit the sell button fast enough.
But I had studied my history carefully and knew something everybody else didn't – the strong always survive.
That sounds cliché, but I'm bringing this up for a reason because this tiny nugget of information – this perspective, really – has helped turn ordinary people into millionaires for years. And it will again.
I want you to be among them.
Here's what everybody else is missing.
Setting the Record Straight on the Global Energy Outlook
Many investors are traumatized by lower oil prices and understandably so. For years they've been fed a constant diet related to Peak Oil, higher prices, and fear at the pumps. I can't say I blame them. I read the headlines, too.
But here's the thing.
The energy crisis is reaching critical mass. As hard as it is to imagine, the low prices giving everybody else fits are a magnificent opportunity.
It's been six months since the Saudis fired the first shot in the current "oil pricing war" by unleashing 30 million barrels of oil a day on the markets. The glut caused traders worldwide to slash prices and made plenty of OPEC members unhappy.
Yet the Saudis continue to pump oil onto global markets anyway because their real target has always been the U.S. shale revolution and the threat it represents to their way of life.
You and I can debate the merits of what they're doing all day long. I think the Saudi government made an unbelievably stupid decision and completely miscalculated the outcome. You may think it's brilliant. I respect your view. Either way though, it's a moot point.
What matters is that the Saudis have deliberately created a short-term pricing disruption and, in doing so, have inadvertently created the best possible investment scenario for us.
Instead of sending U.S. oil producers packing like they planned, the Saudis have actually created an environment where the best managed, best capitalized energy companies are hunkering down, flushing out the weaker players, and emerging stronger than they were before.
Take Schlumberger NV (NYSE:SLB), for example…
When the Going Gets Tough, the Tough Get More Profitable
For months now, expectations have been that the massive oil and gas equipment maker would get trashed by virtue of lower Crude Oil. Instead, the opposite happened.
SLB smashed earnings expectations, turning in $1.06 per share versus the $0.91 analysts expected, despite a drop in Q1 revenue of 9% to "only" $10.2 billion. Not surprisingly, the stock jumped more than 2.3% in pre-market trading and is still trading higher as I write.
It's a graphic example of what I'm talking about here – the strongest will survive… and profit.
Facing lower prices, Schlumberger's management took aggressive cost-cutting measures and actually improved profit margins during the quarter to 24.1%, versus the 22.5% expected. At the same time, the company repurchased 8.7 million shares of common stock at an average price of $82.98 per share, for a total of approximately $719 million.
My point is that here you have a perfect example of a company that is doing better in an industry for which expectations are absolutely terrible. The short-term price dislocation that everybody is so worried about is nothing more than a speed bump in the longer-term scheme of things.
More importantly, Schlumberger will not be the only company in this position. In fact, there are going to be plenty of energy companies that grow despite seemingly overwhelming headwinds plaguing the industry.
I've already recommended two of them, in fact: Williams Companies Inc (NYSE:WMB) and Marlin Midstream Partners LP (NASDAQ:FISH). They're up 21.56% and 15.29% to date, respectively; not too shabby compared with the 0.5% return of the S&P 500 since I recommended FISH in December.
I have no doubt they'll pull even farther ahead over time for two reasons:
- Not a single energy company on the planet is actually worried about being able to sell all of the oil it has.
- According to the International Energy Agency (IEA), surging world energy demand will trigger an estimated $48 trillion in investment by 2035. Analysts forecast that approximately 59% of this will be simply to maintain production at current levels, while the remaining 41% will be to meet rising
I believe that figure is about half of what it should be, though.
When you take into account the amount of capital needed to compensate for aging infrastructure, warfare, and regional security, I think the necessary capital is going to be more like $80 trillion.
The best part of this is that most investors don't yet realize the potential. But they will. More than 80% of all future upstream oil and gas investment will be made simply to offset declines in today's fields.
Meanwhile new fuel and energy supply investment has more than doubled in real terms since 2000, while investments in renewable energy have quadrupled over the same time frame and are projected to double again by 2020.
Some $1.3 trillion was invested in 2013 alone. The IEA is forecasting that figure will rise to $2 trillion by 2035, while annual spending on improvements to energy efficiency will grow to $550 billion.
Factor in the instability in the Middle East – which can cramp supply and bring prices roaring back without a moment's notice – and the case for preparing your portfolio for oil's resurgence is stronger than ever, despite the low prices giving many people pause.
In closing, I'll be back with yet more specific recommendations to play this Trend in the near future. In the meantime, I'd love to hear from you if you're following along with FISH, WMB, or our Halliburton (NYSE:HAL) lowball orders.
Chances are you've got plenty to celebrate.