Last week, I explained why the United States Oil Fund LP (NYSEARCA:USO) broke down.
If you missed it, here's a quick explanation…
USO is an ETF that holds oil futures contracts.
If those futures contracts are held into expiration, it would require the holder to take delivery of goods.
USO is a fund that tracks oil prices, it doesn't want to take physical delivery.
So, it needed to roll over their contracts.
USO happens to also be the largest holder of these oil futures contracts, and when they went to sell, there weren't any buyers.
With no buyers, prices continued to sink lower as the May future contract was going to expire.
This was an unprecedented event, but that not to say oil is doomed in the long term.
Demand will come back, but supply is falling as production across the board has nosedived.
Instead of risking your money on broken ETFs, it's always better to invest in the best two companies that are going to place.
Here's Where The Opportunity Exists
Producers such as BP plc (NYSE:BP) control how much oil is available to the market. They are the ones turning on and off the taps.
So, they are the ones who might rebound the sharpest when oil turns around. At least, some think so.
BP itself just released its first-quarter earnings numbers.
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They weren't great, but they did beat what the market expected.
Adjusted net earnings fell from $2.4 billion to $791 million during the quarter.
Now, that doesn't truly tell the whole story.
The first quarter ended on March 31. Meaning, the coronavirus' effect was only realized for a portion of one month of that quarter. On top of that, the Saudi-Russian oil war hadn't started yet.
Finally, the company has insisted on keeping its dividend despite all of this. Investors are loving it. That's one reason BP is up today. But that could easily change.
With a massive $51.4 billion in debt, a 25% production cut, and plummeting cash flows, BP could be forced to make dividend cuts or slash its buyback program.
Servicing Companies Already Took Their Lumps
Producers only pull the oil out of the ground. They need help to set up and maintain wells.
Enter oil and gas equipment and services companies.
Companies like Halliburton Co. (NYSE:HAL), Transocean Ltd. (NYSE:RIG) and Schlumberger Ltd. (NYSE:SLB) provide the gear and technical expertise producers need to actually drill.
And they have been devastated of late… even before the current crisis:
This chart shows that both have been falling a lot longer than the rest of the market.
One of the main reasons was the oil price outlook.
No one could have entirely predicted how far and fast oil would drop. But an overall weaker environment was expected to some degree.
So, these companies have already been pricing in hardship as well closures were set to increase. The fewer wells mean less work for well servicers like these three.
Positioned Ahead of Time
Schlumberger is worth special attention because it recently slashed its dividend.
Top competitor Halliburton, and producers like BP, haven't slashed their dividend. b
But I suspect they will want to follow suit.
Schlumberger 's poor financial performance seems to be mostly priced in with shares trading at $18.20.
That's not to say a turnaround is going to be quick.
It will take some time for the oil market to heal.
And therefore, equipment and servicing companies like Schlumberger will recover at a slower pace.
But the greatest wealth opportunities often come from crises.
Schlumberger, one of the hardest-hit oil-related companies, could present such an opportunity.