Koil Energy Solutions Inc. (KLNG)

[fazoolius]

Sneak Preview: The Must-Own Sector

By Jim Cramer
RealMoney.com Columnist
12/18/2007 2:51 PM EST

Oil and Oil Service

We are running out of oil, yet it will still be our fuel of choice for at least the next twenty-five years. We aren't producing enough renewable energy to satisfy demand. We are trying to expand nuclear energy, but the power plants are expensive and, in this country, still considered too dangerous and difficult to build. (As someone who for a spell lived next door to a power plant in Sacramento, I find this outlook odd, but then again, who else would willingly live next to one of those scary cooling towers!) Coal is just not attractive anymore, and the technology to make coal clean is costly. That keeps sending us back to black gold, and it is something that a whole host of companies benefits from.

When we speak of oil we think of the majors, the Exxons (XOM) and Chevrons (CVX) and Conocos (COP). These are giant companies that produce stable cash flows and dividends; they are and will remain great investments for years and years.

But, as in any mini- bull market, there are tons of other stock subsectors that will do great because they are involved in energy. We don't have enough refiners, which means that Valero (VLO) and Marathon (MRO) (which also has substantial oil properties) are going to be buys whenever they come down in price.

We have plenty of natural gas in this country, which will increasingly have to be relied on as we run down our crude resources. Natural gas has been cheap in this country because we haven't been able to store as much as we would like. Still, I believe that companies like XTO (XTO), Devon (DVN), Apache (APA), and Anadarko (APC) are all fantastic long- term buys.

For years, we starved the drilling and oil services businesses because oil was priced too low by OPEC to make alternative fuels profitable enough to develop. (OPEC's own inability to produce enough oil was responsible for much of the recent surge in oil prices, which I think will last for years.)

Now there are only a handful of companies with the expertise to drill and harvest the oil that is found. National Oilwell Varco (NOV) is the only major company left that can build drilling rigs. Schlumberger (SLB) is the only company with worldwide ability to find and drill oil. Halliburton (HAL), its smaller rival, has similar skills, but linked more to natural-gas drilling.

The remaining big prospects for oil and gas are all in deep water in remote areas, and only Transocean (RIG) has the rigs -- and the might -- to hit pay dirt in those areas. Core Lab (CLB) and FMC Technologies (FMC) have the brainpower, the intellectual capacity, to get the most out of wells thought to be spent.

All of these service companies work for publicly traded oil giants and nations that are eager to exploit their resources. If I could invest in only one sector, if you put a gun to my head and said, "Promise me you will not diversify," I might just let you pull the trigger, that's how important diversification is to me. But in the end, I would relent and say, "If I have only one sector to give to my portfolio, let it be oil and oil service."


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-faz