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Oil Service Stocks vs. Big Oil Stocks

by Vitaliy Katsenelson
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T. Boone Pickens knows oil better than most people out there, definitely better than me. However, his calling into CNBC seemed like a desperate attempt to influence oil prices. I’m…

T. Boone Pickens knows oil better than most people out there, definitely better than me. However, his calling into CNBC seemed like a desperate attempt to influence oil prices.

I’m not a big fan of large oil companies as most of them have little or no organic production growth and they are completely at the mercy of oil prices, but I am getting interested in oil service stocks for several reasons:

Oil service stocks are not as sensitive to oil prices as long as prices stay about $30+, oil companies will be making holes in the ground at a nice pace.

They are better businesses – oil companies need to spend billions of dollars just to replenish their reserves (maintenance capex), then they have to spend billions on top of that to grow sales – not great businesses. Oil service stocks are on the receiving side of this capex and have relatively small maintenance capex. If the industry’s growth slows down, oil companies will still be spending billions on capex to replenish dwindling reserves (good for oil services stocks), where oil service companies will see a tremendous increase in their free cash flows which means high dividends and share buybacks.

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