Hedging Your Energy Portfolio With Big Data

Too often investors in the energy sector put on blinders and fail to consider energy related opportunities that are not in the traditional energy company mold. That is particularly damaging today as oil prices continue to struggle and energy sector stock prices as a whole are stuck in neutral or even trending downward. Technology today is changing the way many companies do business and nowhere is that more true than in energy given the price collapse in oil. To that end, investors looking for energy sector opportunities might consider looking at the emerging megatrend in Big Data.

For those who are not familiar with Big Data, the basic idea is that statistical analysis can be used to help businesses better understand their operations and their customers, thus improving profitability. In the oil patch this can mean using statistical analysis to understand where to drill the next well, which employees are the most productive, what future production mixes will look like, or even what might happen to oil prices under various scenarios in the future.

Clearly big data is valuable from any company's point of view. But most energy companies want to focus on their core competency which is not statistical analysis or software development. As a result, energy companies are increasingly looking to outside firms for customized software offerings to help improve operations using data. That's especially important given the shrinking opportunities for further margin compression in the supply chain. Privately held Tibco (formerly traded under ticker symbol TIBX) was a great example of that kind of company.

For investors looking for new opportunities though, there are still plenty of strong choices to invest in the big data/energy universe. Two in particular stand out.

First, Splunk (SPLK) is a data analytics software provider that helps companies to understand everything from operational asset health to infrastructure security. The firm provides software to the energy industry to help with monitoring assets, protecting infrastructure against cyber threats, streamline NERC compliance reporting, and get real-time insight from sensors and industrial equipment. Splunk is just starting to get to the point where it is profitable, so on a valuation basis it looks expensive.

The attractive thing about Splunk though is its growth rate looks great. For instance, revenue at the firm was up 50% yoy in its latest Q3 report. That kind of growth looks likely to continue for a long time to come. From a diversification standpoint then, Splunk provides a really nice compliment to beaten down traditional energy companies that score high on the value spectrum right now but have questionable revenue growth in the absence of a strong rebound in oil prices.

A second company worth considering is Tableau trading under ticker symbol DATA. Like Splunk, Tableau provides software that helps with data analysis. The company's energy sector products help with upstream and downstream analysis as well as oil and gas well visualization. The company is growing even faster than Splunk as well with revenues up 78% in 2014 and up 63% in the third quarter of this year on a year-over-year basis. Both Splunk and Tableau use a licensing business model so their revenues (and eventual substantial profits) should be very sticky. The stock is not cheap but it has pulled back in recent months and represents a good value versus its price earlier this year despite handily outperforming analyst and investor expectations of late.

Both Spunk and Tableau are not traditional energy stocks by any means. They aren't even in the energy sector. But they do supply and increasingly important input for the energy sector; data analytics technology. Some investors may be concerned about the low profitability of both firms right now, but in that regard these big data stocks have something very much in common with traditional fracking stocks - both groups are reinvesting most of their revenues in expanding the business as much as possible. The criticism of fracking firms by many prominent investors has been that they did not make a profit even when times were good and prices were high. That critique wrings a bit hollow though since the markets were demanding production growth and that is exactly what management provided. Today, big data companies are expanding their businesses and plowing profits into growth opportunities. Given the barriers to entry in the market and the limited competition, these growth stories are unlikely to end the same way as the fracking story has thus far. Investors should take note.