TER: We have talked before about opportunities in service companies. Are you still finding that they are profitable in this environment? Are there some that really stand out to you?
BH: Some investors would think it's a little early to look at service stocks. We would probably agree when it comes to fracking companies and some of the other service providers, but we think it may be an interesting time to look at drilling companies. We are starting to see market share being overtaken by higher-quality, higher-horsepower rigs that can drill multiple wells per pad, as well as rigs that can move much more quickly to different drilling locations.
Their drilling days are shorter, which creates a tremendous amount of efficiency and lowers costs for operators. These are the kinds of drilling rigs that operators are looking for, especially in a low commodity price environment.
Patterson-UTI Energy Inc. is starting to garner market share in this space. We think over the next 12–24 months, this market share will continue to grow. The utilization of higher-end rigs should be well over 90%—maybe even sold out in this particular category over the next 24 months—which implies higher day rates for these higher spec rigs. The three or four companies with this capability should do well and should be buffered by any weakness in the oil services space.
Then, as oil prices begin to recover and move back up, operators will increase their capital budgets, and they're going to want these premium rigs. The companies we're looking at, such as Patterson, should thrive.
TER: What advice do you have for investors looking to take advantage of opportunities over the summer without getting burned?
BH: Investors need to focus on the long term. I know it's difficult to think that way when we're bombarded with negative short-term data points. But current crude oil prices are not sustainable at these levels. We cannot replace global production. Demand continues to grow outside of the developed markets in the emerging world. That does not appear to be changing. If we do not see a higher oil price, we're not going to be able to offset the global decline rate in current production or meet future demand.
We believe that we are in the early innings of a recovery in this energy cycle. The companies that are able to withstand the volatility are going to do quite well, and get bigger. There's a tremendous amount of opportunity in the energy space right now. We're very encouraged. It's not to say that we couldn't see more volatility, but I would look at that volatility as an opportunity to add to positions because, over the long run, we will see higher commodity prices and higher share prices within the energy patch.
TER: Thank you for sharing your insights. Have a great summer.
Brian Hicks joined U.S. Global Investors Inc. in 2004 as a co-manager of the company's Global Resources Fund (PSPFX). He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group as an industry research and product development analyst. Hicks holds a master's degree in finance and a bachelor's degree in business administration from the University of Colorado.