Lee Munson and Patrick Kirts assess volatility in energy markets. Published on Seeking Alpha.

After seeing the historic volatility in oil over the last year we at Portfolio Asset Management asked a simple question: How should we take on risk in the energy markets? Warren Buffett once said, “Risk is not knowing what you’re doing.” Others see risk as the chance of permanent loss. We agree with those ideas, so in this context we need an investment well positioned to handle the uncertainties of the oil market.

First, we don’t know where oil prices are going in the short term, and that means companies extracting or producing oil (E&P’s) have uncertainty in earnings. Second, the end user (you, me, and China) is under pressure. We saw Exxon exit the gas station business this year as competition increased. Refineries and retail sales operations do not excite us. Third, political uncertainties are at fever pitch.

Oilfield services contractor Schlumberger is the Switzerland of the energy industry. By focusing only on servicing fields, they gain the trust of their largest client base, independent oil companies, by not competing with them. National oil companies, which control 60% of the world’s reserves and are its second largest client base, do not want an integrated oil company competitor managing their oil fields. Even the large, integrated oil companies depend upon their services.

Over the past four decades, Schlumberger has built an international management team and workforce. The ability to share and act on innovation is at the core of their culture. This is in direct opposition to many competitors, who rely on management from their home countries.

Read the full article here.