Despite these tough times, there are certain expenditures that folks simply can't ignore. If your car breaks down, odds are you'll fix it. You need it so you can go to work and make money to pay for all those other necessary expenditures. That's good news for your auto mechanic and your auto parts suppliers.
In a roughly similar way, the oil industry needs its repairmen and parts suppliers. Even in the face of declining oil prices, major oil companies are involved in multiyear projects, and they can't be completely shut down when prices are declining. Here we'll look at a company that's well-positioned to benefit from the expenditures oil companies must continue to make in order to operate.
IN PICTURES: Eight Ways To Survive A Market Downturn
The Oil Industry's Necessary Expenditures
For many companies, it may be prudent to aggressively continue with big projects despite the downturn. This way, when the cycle turns, operations will be at peak production levels. If you look at Exxon Mobil (NYSE:XOM), you will notice that capital expenditures increased from $15.4 billion in 2007 to $19.3 billion in 2008. Similar increases also occurred at Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP).
A Key Player
It would seem intuitive that a great way to play oil would be to focus on businesses that cater to the needs of oil companies. Such companies should actually experience a pick up in demand now that the price of oil has stabilized somewhat and the global economy is no longer in a free fall. One of the best in the space is Lufkin Industries (Nasdaq: LUFK), a supplier and installer of oil field pumping equipment. Lufkin's products help oil companies increase efficiency. Lufkin's technology helps aging oil wells remain operative for longer than they otherwise would. The company also makes and services gearboxes for industrial applications.
The company operates all over the world and has been in business since 1902. The company is debt free, and sells for $45 a share or 10.5 times earnings. When the market was enamored with oil, Lufkin shares fetched nearly twice as much as today's current price. It's likely Mr. Market will once again be enamored of this stock.
At $700 million, the company's market cap is about 10 times the free cash flow earned in 2007. Free cash flow for 2008 was substantially less at $18 million, but the company's free cash flow in the 2009 first quarter came in at $35 million. Don't expect 2007 numbers in 2009, but 2010 could be a great year for Lufkin as the company's business gains ground.
Bottom Line
Lufkin benefits from the passage of time as oil wells continue to age. Shares are neither cheap nor expensive, but the world's aging oil infrastructure bodes very well for the future of this company. (For more, check out The Industry Handbook: The Oil Services Industry.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
