The US capture of Venezuela’s Nicolás Maduro has ushered in a new era of uncertainty. Politicians and strategists may still be assessing its implications. But investors have voted with their wallets — and they clearly think Donald Trump’s “Donroe doctrine”, a mangled version of the 19th-century Monroe doctrine, will be exceedingly positive for US stocks.
For evidence, look at US oilfield services companies such as SLB, Halliburton, Baker Hughes and Weatherford. Shares in these groups, typically hired by oil companies to drill wells and build associated infrastructure, collectively rose almost 7 per cent on Monday, creating about $10bn of market value, before wobbling a little on Tuesday.
Imagine, for a minute, that markets are good predictors of the future. It’s worth thinking about what that sum of additional value really means. Most simply, it says that investors expect the companies involved to make extra profit from the large-scale return of international majors and contractors to the Venezuelan oil sector. Since US oilfield services companies typically trade somewhere around 15 times forward estimated earnings for the coming 12 months, that $10bn of additional market capitalisation is akin to $660mn of extra annual earnings.
There’s no profit without revenue, of course. Based on their current margins, investors in the oil drillers are pricing in about $7.5bn of additional top-line income a year. That might be conservative, since drilling onshore wells and revamping infrastructure tend to be relatively low-margin jobs.
This might not seem too extravagant — until one remembers that investors should be applying some sort of probability to this revenue actually materialising. After all, oil majors will probably need to see a stable regime and much better contractual terms before they start hiring contractors to help them revitalise Venezuela’s oil production.
Attribute, for the sake of argument, a 10 per cent chance to this happening. Now, the future revenue required to justify the increase in drillers’ shares booms to $75bn a year. For reference, the four oilfield services groups are forecast to generate $13.3bn of combined revenue from the whole of Latin America this year, according to Rothschild & Co Redburn and Visible Alpha estimates.
So what explains investors’ optimism? They may be factoring in a much higher likelihood of Trump’s Venezuelan incursion resulting in a new gusher of oil on to world markets. They may also feel that, with the US throwing its weight around, American oil contractors are likely to get better-than-usual terms. Or, maybe, they are looking ahead to more intervention in other oil-rich regions, such as Iran.
The likeliest answer — and in some ways the most benign — is that they are doing none of these things. The pop in drillers’ stocks may simply be the result of momentum, much like that seen in other sectors such as technology. Running the numbers, in that case, may merely show that in the new age of the “Donroe doctrine”, educated guesswork is rapidly losing its predictive power.
