ETFs

Equities For Expanding Offshore Drilling

In an attempt to increase the nation’s energy independence, President Obama recently announced plans for an expansion of U.S. offshore oil and gas drilling paving the path to prosperity for some.

More specifically, President Obama openly stated that he would consider new areas for drilling off the shores of Virginia and Florida, parts of Alaska and in the Gulf of Mexico. 

As for Virginia, the Interior Department estimates that the proposed leased area holds nearly 130 million barrels of crude oil and 1.14 trillion cubic feet of natural gas and will be the first new offshore oil and gas sale in the Atlantic Ocean in more than 20 years. 

Although the United States uses roughly 20 million barrels of crude oil per day and these changes off the Virginia coast will not have too significant of an impact on the supply and demand forces of crude oil and natural gas, it is the beginning of an attempt to tap into and efficiently use our nation’s own resources. 

Two companies that are likely to benefit from this announced plan include XTO Energy (XTO) and Chesapeake Energy (CHK), the nation’s two largest natural gas producers.   XTO and CHK closed at $47.18 and $23.64, respectively.

Oilfield services and supplies companies as well as those who specialize in constructing and manufacturing of products that are used in oil and gas drilling are likely to reap the benefits.  Some to watch here include Halliburton (HAL) and National Oilwell Varco (NOV), which closed at $30.13 and $40.58 on Wednesday, respectively. 

Gains in the sub-sector could also help lift the iShares Dow Jones US Oil & Gas Exploration (IEO), which boasts XTO Energy and Chesapeake Energy in its top holdings and the Oil Services HOLDRs (OIH), which allocates nearly 37% of its assets to Transocean Inc (RIG), Halliburton and Schlumberger Ltd. (SLB).

Although the anticipated expansion of drilling is likely to support the prices of these equities, it is equally important to keep in mind the inherent risks and volatility involved with investing in equities that primarily generate their revenues through commodities.  To help protect against these risks, the implementation of an exit strategy which triggers price points at which an upward trend could potentially be coming to an end is of importance.

According to the latest data at www.SmartStops.net, an upward trend in these equities could come to an end at the following price points: XTO at $46.07; CHK at $22.72; HAL at $29.09; NOV at $39.34; IEO at $53.04; OIH at $118.50.  These price points change on a daily basis as market conditions fluctuate and updated data can be found at www.SmartStops.net.

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