Tight Oil Drives Growth

Top 5 Integrated Utility Companies To Buy For 2015

Energy is one of the most critical inputs to the global economy; it heats homes, powers factories and, perhaps most importantly, fuels our cars, trucks and planes. Without energy, no value is added at any link in the economic chain. As a result, the economy as a whole – and inflation – is critically sensitive to virtually any shift in global energy prices and oil is energy. That is why rising oil prices tend to play such a causative role in rising inflation.

Interestingly, though, while average gasoline prices have taken a sharp rise since late October, up from an average of $3.19 to the current national average of $3.66, oil prices have been remarkably stable. Despite spikes related to the Russian invasion of Ukraine's Crimea region and other potential supply disruptions, as you can see from the chart below, the price of oil has been quite stable relative to historical experience.

Why is there such a disconnect between oil and gasoline prices? Despite the fact that oil and gasoline make just about everything go and demand has been steadily rising for decades now, oil production has had difficulty keeping pace. And since 2005 most production growth has come from the increased exploitation of shale formations and hydraulic fracturing.

Since 2005, global production of crude oil has grown by 2.3 million barrels per day (MBPD) and over that same time period U.S. production of shale oil has grown by 3.5 MBPD. Not only is the U.S. essentially responsible for all the production global production growth since 2005, it has also made up from 1.2 MPBD of lost production elsewhere in th! e world.

While the gasoline price spike since October can be largely attributed to seasonal factors – traveling increases in the holiday and summer seasons – tight global oil production could result in higher gasoline prices becoming a fact of life. Here in the U.S. nearly 75 percent of the oil we consume goes to transportation and higher gasoline and other distillate prices are the only effect mechanism for rationing it.

That pricing mechanism, coupled with rapid advancements in drilling technologies and know-how, has also made it economical to produce once-untouchable oil reserves, such as those in deepwater or in shale formations and oil sands. It has also driven a huge push to increase global oil production in the coming years and created an opportunity to not only profit from the energy boom but also hedge your portfolio against the damaging impact of energy inflation.

One interesting play on that theme is Cameron International (NYSE: CAM). Cameron provides separation and pressure control equipment, flow control, compressors, valves and other equipment to the global energy industry, as well as the services to install and maintain it. About 20 percent of its $2.4 billion in first quarter revenue was generated through equipment and service sales to US onshore energy producers, mainly those tied to the fracking boom. Another third was related to offshore production activities, most of which were complicated deepwater projects. Most of the remainder was tied to service contracts to maintain installed equipment.

In the first quarter the company's revenue grew by grew by 18 percent year-over-year. While revenues fell in its valves & measurement and process & compression segments, revenue in its drilling & production systems (DPS) operations shot up by 34.4 percent. It also received $2.5 billion in orders in the quarter, taking its total backlog to a record $11.3 billion, driven primarily by DPS orders.

On the earnings front, it beat analyst's consens! us estima! te by 3 cents, earnings 75 cents per share. Management also produced a much more optimistic outlook for full-year earnings, bumping up its forecast of between $3.60 and $4.00 per share to between $3.80 and $4.10, thanks to the continuing boom in oil production. While many of the major oil producers are struggling with higher costs largely due to legacy projects, production here in North America is continuing to rise and deepwater drilling activity remains robust.

As stable oil prices ensure that all of this drilling activity remains economically viable and rising gas prices signaling growing demand, there's little reason to believe Cameron's business should drop off any time soon. So not only will investors profit from the growing earnings, a position in Cameron will provide a hedge against rising energy prices. Cameron International is a buy up to 70.