The volatility in the price of oil this year has thrown the complexities of investing in the oil sector into sharp relief. After almost three years of price declines and a supply glut, near-term prices have stabilized, a clear sign that the market believes the oversupply is coming to an end. Indeed, we believe demand next year will exceed 100 million barrels a day and that the capital expenditure of the producers needs to increase to meet the demand.
In a rising demand environment, it is the service providers and vendors that will do especially well, with much of this segment of the market currently undervalued. For example, oil rig operators are priced at very depressed valuations; over the last three years, oil rig operators' equity valuation is down almost 90%. New rigs can be acquired directly from the shipyards at a 30% to 40% discount to the cost price. By looking at these deep value opportunities, investors should benefit from the short-term uplift in the oil price without overexposing themselves to negative demand dynamics in the future.