Where To Invest As Oil Turns Around

I feel like Bush 41, advising to 'stay the course' as the oil markets continue to roil. We're on the right track, identifying and investing in independent U.S. exploration and production companies for the long haul in our first phase of this recovery from the "great oil bust II".

I've been fairly surprised myself at how spookily prescient I turned out to be in my book "Shale Boom, Shale Bust", written almost a year ago. The progression of oil prices and the concurrent changes happening to U.S. oil producers have followed the script almost perfectly. We isolated several scarily overleveraged oil companies back in the spring of 2015 that we thought were in danger of not making it to the next oil boom and we've seen many of these names indeed declare Chapter 11 - the latest being Halcon Resources (HK), but including Goodrich Petroleum, Linn Energy, Ultra Petroleum and Penn Virginia.

We also isolated those independent E+P's that had solid acreage that wasn't being overexploited and balance sheets that could stand a long term of oil prices that remained under $50 a barrel. In being diligent on accumulating these, even as oil prices swooned below $30 a barrel, we've accumulated a core holding of oil companies that are destined to return terrific gains over the next several years; names like EOG Resources (EOG), Cimarex Energy (XEC), Hess (HES) and Anadarko Energy (APC).

The next stage of the turnaround in the oil bust, provided you have already accumulated a core portfolio of E+P's, is to turn to the next sector that will benefit from the next oil and gas renaissance - oil services companies.

We've been careful not to prematurely recommend anyone in the services space, as the oil bust put even greater pressure on service companies to cut costs and reduce prices - and that competitive balance won't change very quickly as U.S. production continues to swoon for the next few years.

But there are some services companies that are worth keeping on your radar as the next subsector to buy in the coming months: Three that I will talk about are Schlumberger (SLB), Baker Hughes (BHI) and Helmerich and Payne (HP).

Schlumberger has been and remains the benchmark of oil services companies; the Exxon-Mobil (XOM) of drilling. Even during the lowest moments of the crude oil slide, shares of SLB never breached $60 share and at $73 now, it's hardly made its big move yet. Their acquisition of Cameron International gives a great one-up in the deep-water space, whenever that cycle turns around (it won't be soon). But if you're looking to start to accumulate oil services stocks, Schlumberger is a great way to start.

The coming merger of French services giants FMC Tech and Technip will add even more competitive edge to an already lean oil services business and many think that Baker Hughes is one major services company that would be lowest on the totem pole after the failed Halliburton (HAL) buyout. I don't agree. While not a specialist in any particular area, the failed merger (along with the $3.5b breakup fee) helps BHI concentrate on horizontal drilling services where they're on an equal footing with the big boys. I believe that as bad as the fracking industry looks now is as strong as it will again become in another year or so and this will benefit BHI in particular. Its shares have taken a ton of abuse compared to the 'majors', but I've made a lot of money in the past buying BHI at around $42. If it gets there again, I'm going to be a buyer again.

Finally, in the same vein of onshore horizontal services, I like fracking specialist Helmerich and Payne. They were the pressure pumping darling as U.S. shale levered up in 2013 and 2014. Although they've lost some of that tech edge, they'll still benefit as shale returns to profitability and stability in 2017 and beyond. HP is down more than 50 percent from its highs and retains great appreciation potential.

All of these may still be premature, but should now be looming on your radar, as we look for new energy opportunities to add to our core E+P names.