How The Saudi Oil Attack Affects My High-Yield Turnaround Pick
You’ve most likely heard of the attack on a Saudi Arabian oil production facility. On September 14, a salvo of cruise missiles rained down on state-owned Saudi Aramco’s Abqaiq facility, crippling infrastructure that handles 5.7 million barrels per day.
Approximately 5% of the world’s entire oil supply passes through this facility, making this one of the biggest supply disruptions on record. It was worse than Hurricane Katrina, the Invasion of Kuwait, the Libyan Civil War and other such events.
#-ad_banner-#As you might expect, oil prices immediately shot higher on the news. Benchmark Brent Crude spiked about 20%. West Texas Intermediate (WTI) Crude also moved sharply higher. There has probably been an impact at your local gas station as well (mine went from $1.99 to $2.29 per gallon almost overnight).
Government officials were quick to blame Iran for the strike. Secretary of State Mike Pompeo went so far as to declare the unprovoked attack an overt “act of war.” And the President ordered tightened economic sanctions.
Meanwhile, investors wasted little time in bidding oil-related stocks sharply higher.
Within hours of the opening bell the following Monday, Marathon Oil (NYSE: MRO) was up 12%, Devon Energy (NYSE: DVN) rallied 13%, and Apache (NYSE: APA) was soaring 19%. My colleague Amber Hestla wrote an interesting piece a few days later showing how this event may hasten what was already an abrupt shift in investor sentiment from bearish to bullish in the downtrodden sector.
The strike has been characterized as “surgical,” designed to inflict heavy damage to key equipment in at least 17 different spots. It remains to be seen how much capacity stays offline and for how long. Early indications suggest that repairs are being expedited quicker than expected.
Oil prices have moderated following that assessment, and the market is taking back some of the aforementioned gains. But with emergency stockpiles being tapped, this incident is a good reminder that all it takes is one disaster (manmade or otherwise) to upset the delicate supply balance.
There will likely be more saber-rattling in the weeks ahead, but hopefully hostilities won’t escalate. Even before this attack, OPEC was contemplating another round of supply cuts. For now, its hand has been forced.
If for any reason it looks like there will be a longer supply disruption than anticipated, then upstream producers like BP (NYSE: BP) and Occidental (NYSE: OXY) will be the biggest beneficiaries.
(Related: This High-Yielder Just Went On Sale)
But higher prices will stimulate spending on oilfield drilling and exploration, giving a much-needed shot of adrenaline to service and equipment providers like High-Yield Investing portfolio holding Schlumberger (NYSE: SLB).
I wrote about the beaten-down stock back in July. Here’s a brief summary of the “big picture” case I made:
So is the oil and gas industry following print media into relative obscurity? I rather doubt it. The latest forecast calls for annual global energy demand to rise by 27% (or 3,743 million tons of oil equivalent) by 2040. And even with renewable power on the rise in many places, hydrocarbons will still account for between 75% and 80% of the world’s power over the next two decades.
That won’t be possible without Schlumberger, which operates in 85 countries worldwide and has the dominant No. 1 market position in over a dozen categories. From fracking/pressure pumping to high-resolution seismic data, the company has the tools and analytical expertise to help producers evaluate oil and gas deposits and drain them in the most optimal manner.
Action To Take
In that same piece, I stated that while we were a little early to the party when we bought the stock, I was confident in the company’s overall long-term prospects. That hasn’t changed.
SLB bounced from the lower-$30s to near $38 in recent weeks but has retreated back to about $32. I still think the company is poised for a rebound — and in the meantime, my High-Yield Investing subscribers and I will be happy to collect a solid 5.4% yield while we wait.
In the meantime, if you’re looking for high yields in this low-rate environment, then I invite you to learn more about High-Yield Investing. We’re collecting the kinds of yields most investors dream about… I’m talking about 6%… 8%… even as high as 12%. Go here to learn more now.