I have been following the energy sector for quite a few years. I can tell you without question this is the strongest environment for oil services that I have seen. The recent spate of selling does not portend poor EPS performance in this sector. The selling likely has nothing to do with the prospects of EPS growth for this sector. It may very well be that some fund managers need to raise cash to cover losses elsewhere.
I was here in May of 2006 when the OIH started a nosedive. It came roaring back. I was also here in August of 2007 when the sector took a nosedive. It came roaring back.
THERE IS NO EARNINGS RECESSION IN STORE FOR THIS SECTOR.
Backlogs and EPS and free cash flow are at record levels and projected to grow for years to come. The IEA (based in Paris) recently projected oil demand/supply tightness for the next 5 years (if not longer).
Some people argue that some oil service stocks trade up and down with oil and natural gas prices. That may well be true to some degree. However, the EPS growth of these companies is not subject to collapse if oil prices drop to $100. Not even close. The demand for oil services is projected to grow despite high commodity prices. Any relief in commodity prices should bolster demand.
The fundamentals of this sector are solid. I have not heard one single major oil service company pre-announce bad news. Schlumberger (SLB) kicks things off on July 18. I am willing to bet they will report decent numbers and note the strong recovery of oil service demand in North America in 2009 (especially for natural gas drilling which is certainly going on). I do not believe any major oil service company would wait until the day of their respective EPS report to hit us with bad news. I believe they would pre-warn. I haven't seen a single warning.
Unfortunately, the Ultrashort Oil & Gas (DUG) fund managers seem to care less about the facts and keep shorting stocks like SLB & NOV as soon as new money comes in. With assets over $2B and significant amounts of leverage, short funds such as DUG can do quite a lot of damage to companies. From our analysis, the DUG ultrashort fund appears to include infrastructure companies such as MDR, FWLT as well as FLR into their short lists.
In fact, the decline in steel prices should help the sector out. Any drop in oil prices will quickly translate into increased demand. I cannot fathom this sector's earnings falling unless we experience a massive global recession. The existing production base is declining and all new finds require more extensive drilling and services. How can the long-term investor go wrong with this sector? Let the traders do their thing and buy in on the dips.