Drilling for the Right Oil Stocks

If oil trading was as easy as looking out the window to check the weather – or following inventory numbers, for that matter -- then Cramer’s 25 years of experience in the industry wouldn’t mean much. There would be no reason to watch the show, read the books or bookmark this blog. So does anybody honestly think this is how it’s done?

The best way to determine a company’s future earnings per share – the health of the business – is to study its customers. In aerospace, you’d look at what the airlines want. Auto parts? Analyze what the car companies need. Home builders? Check the appetite for new homes. Oil is no different.

Home Gamers that follow the industry might remember last week’s talk about Petroleos Mexicanos astonishing shortfall in production. Then there was Exxon Mobile admitting that it was too conservative back when it thought oil was going back down hard. This week Chevron and ConocoPhillips hold analyst meetings, and Cramer expects to hear them both say the same thing: They need to replenish their reserves.

Cramer says there’s plenty of oil out there for the taking, it’s just in those hard-to-reach places. So these companies will become the customers of the drilling companies that can help them grow their reserves. But not just any drillers – least of all the domestic natural gas drillers. That’s a business is in decline.

Schlumberger is the best oil service company, as far as Cramer is concerned. And it’s undervalued. Then there’s National Oilwell Varco, the company that makes the rigs necessary for deep drilling to find those untapped reserves. NOV was set up as a virtual monopoly because the rig business was so bad for so long when oil was low and unworthy of investment that there could be only one. Now the company is wildly profitable and has years upon years of backlog that should keep the estimates high for a long time.

Number three is GlobalSantaFe, one of the premier deep-water drillers. This company has complained endlessly about its low valuation, so it took matters into its own hands with an aggressive buyback. There’s going to be consolidation among the drillers, Cramer says, and Global Santa Fe is open to mergers. He thinks it’ll be doing one in the near future.

Bottom Line: There’s money to be had in oil – just try SLB, NOV, GSF. Stay tuned for two more.

Questions? Comments? madmoney@cnbc.com