The Unsung Heroes of the Oil and Mining Sectors are Set for a Windfall
Samuel Brannan became the richest man in California in 1849, during the Gold Rush.
But he didn’t make his money by hitting a mother lode of the precious metal. Instead, he made his mint by selling picks and shovels to prospectors.
Now fast forward 150 years or so…
Mining and oil companies are boosting their capital spending tremendously. And that’s sure to give a boost to the businesses that service them… and to those businesses’ shareholders.
Get Ready for the Mining Investment Boom
Mining companies around the globe are ready to boost their capital spending this year to record levels. They haven’t felt so optimistic in two years.
In 2009 and 2010, they slashed expenses to preserve cash and guard against the economic crisis. Naturally, that hurt the service companies they otherwise would have relied on.
Global mining companies expect to increase exploration and mine expansion investments to $115 billion to $120 billion in 2011. The last time it came close was in 2008, at $110 billion.
And in the 15 years before the commodities super-cycle began in 2003, mining companies spent an average total less than $40 billion a year on capital expenditures. So these 2011 figures are a very big deal.
[More from Tony D'Altorio: "Why Everyone is Talking About America’s 'New Oil'"]
Mike Sutherlin, CEO of Joy Global (Nasdaq: JOYG), sums up industry optimism: “We are entering the earlier stages of another multi-year expansion of the industry.”
The main beneficiaries of this spending boom include manufacturers of earth-moving equipment such as excavators and trucks, and underground equipment such as drillers.
That gives Caterpillar (NYSE: CAT), Komatsu ADR (PINK: KMTUY), Sandvik ADR (PINK: SDVKY) and Atlas Copco ADR (PINK: ATLCY) good reason to smile this year.
The Oil Services Industry Gears Up
The oil services industry is also gearing up for big business too. Oil and gas companies are boosting capital expenditure plans after a prolonged period of steady to higher prices.
Not that long ago, they struggled, as global consumers cut down their energy use. But now they seem on the cusp of a rebound.
Even unrelated companies seem to think so. The General Electric (NYSE: GE) buyout of British oil service firm Wellstream shows a renewed confidence in the sector.
Sure, the last 18 months have produced relatively lackluster investments. But the industry expects a 10-15% increase in capital expenditure this year.
Very large oil companies are leading that rebound. Chevron (NYSE: CVX), for instance, boosted its capital spending target this year to $26 billion.
That marks a $4.4 billion increase from 2010 and a record budgeted amount in this area.
The world’s six largest, non-state owned oil companies are expected to spend a record $128 billion on capital investment in the next 12 months. That list consists of: Chevron, ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP), Total ADR (NYSE: TOT), Royal Dutch Shell ADR (NYSE: RDS.A) and BP ADR (NYSE: BP).
So says Jason Kenny, an oil and gas analyst at ING. His prediction compares to a forecasted $117.35 billion in 2010 and well over the 2008 record of $127 billion.
The next few years should prove particularly profitable for offshore exploration activity. After all, most of the new reserves lie offshore, especially in deep waters.
And Rebecca Fitz, senior manager of the Upstream and Gas Group at the energy consultancy, PFC, says, “In 2014, about 63% of the majors’ new source production is forecast to come from the offshore, shallow water and deepwater.”
Investors can best play this trend by purchasing SPDR S&P Oil & Gas Equipment and Services (NYSE: XES). This ETF is well balanced, with a portfolio almost evenly divided among the 26 holdings.
Good Times Ahead for the Mining Services and Oil Services Sectors
Investors should note the similarity between the mining services and oil services sectors.
From 2003 to 2008, these sectors enjoyed the commodities super-cycle built on increasing demand from emerging economies. But the global financial crisis derailed all of that.
But now that trend has begun anew.
Many mining and oil services business are enjoying a “re-rating” too, as investors finally become aware of the upswing in spending. They’re now pricing in the likely upside.
Barring another global financial crisis, the good times don’t look likely to end anytime soon either. So any short-term price weakness should be viewed as a buying opportunity.
– Tony D’Altorio
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Source: Investment U
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