Crude oil prices have been strong as the U.S. economy continues its slow but steady recovery. Over the past week, oil approached the $100 per barrel mark before backing off as markets responded to hawkish statements from the Fed. At this point, there is an ongoing debate as to whether oil prices will rise or fall.
On one side of the debate, economists worry the U.S. recovery is still not strong enough to significantly boost energy consumption. Emerging markets (specifically China) continue to face material challenges. And crude inventories are still high compared to historical levels.
However, bullish arguments include the fact that the U.S. recovery is certainly making progress. Employment levels are improving, and as the recovery picks up momentum, demand for energy will naturally continue to increase. Tack on the unrest in Syria – which adds uncertainty to global energy markets – along with continued stimulus from the U.S. Federal Reserve (inflationary), and it’s not hard to see why oil prices are rising.
From a technical perspective, oil prices have been trying to break through key resistance levels, and appeared to clear a significant trend line earlier this week.
The pullback following the Fed announcement is actually less troubling than it might initially appear. Don’t forget the Fed is becoming more hawkish because of
strength in the underlying economy.
That economic strength will drive demand for energy, helping to boost the price of oil. Natural gas prices have also been rising over the past week and are well off the 2012 lows.
With energy prices near recent highs, there is an added incentive for oil and gas producers to step up production. If production levels are increased, the companies can capitalize on higher energy prices and boost profits.
It is also important to note that many energy companies are sitting on properties that have proven reserves, but the resources are more expensive to get to. When oil and natural gas prices are low, these properties sit dormant. But as energy prices increase, the properties can be profitably developed based on a higher selling price for the oil they produce.
So with a bullish backdrop for energy prices, oil service stocks (particularly the drilling companies) are becoming strong investment candidates.
Nabors Industries: Rebounding after cost issues
Shares of
Nabors Industries (
NYSE: NBR) are trading at a very appealing value as the company is recovering from challenges over the past few quarters. Nabors has a wide geographic footprint, with operations across the globe. The company operates 473 land drilling rigs, 546 land servicing rigs and 44 offshore rigs.
The company got off to a slow start this year because of a particularly rough winter, which affected operations in the Canadian and Alaskan regions. The company has also been dealing with additional costs and lost revenue associated with transporting some key rigs to other locations. Finally, the company has been investing heavily in new technology, adding rigs with better capabilities and retrofitting old rigs to be more efficient.
Delays, costs and investments have temporarily depressed the company’s profits (and pressured the stock price). But it now appears Nabors is well-equipped and ready to ramp profits over the next several quarters.
Analysts currently expect the company to make $1 per share in 2013, and then grow earnings by 40% to $1.40 per share in 2014. The stock is currently trading near 17 times this year’s earnings, and less than 12 times next year’s expected earnings. Nabors also pays a 1% dividend yield, which adds to the attractiveness of the stock.
Based on the improving operational outlook for the company, along with the strong environment for drilling, Nabors could quickly rally to 15 or 20 times 2014 estimates –
at the same time those estimates are being revised higher. With both estimates and the stock’s valuation improving, shareholders could see a 30% to 50% increase over the next few quarters.
Helmerich & Payne: Stable revenue with potential for upside
Contract driller
Helmerich & Payne Inc. (
NYSE: HP) does a significant amount of work for energy companies that are in the developmental stage of harvesting energy resources. In this stage, it’s important to use a driller with extensive experience in order to pull oil and gas out in the most efficient manner possible.
About two-thirds of Helmerich & Payne’s rigs are employed under long-term contracts. This gives the company a very stable revenue base, regardless of any rise or fall in fair market drilling prices. The other third of the company’s fleet is engaged on the “spot market” – meaning the company gets paid a variable rate for this portion of its rigs.
If spot prices pick up over the next few quarters, Helmerich & Payne will capture extra profits, although its long-term contracts will keep it from fully exploiting the price increase. On the other hand, if spot prices decline, investors will be somewhat sheltered because the company will continue to receive stable revenues from two-thirds of its fleet.
Helmerich & Payne is particularly attractive for conservative investors because of its steady revenue profile. Also, the stock is trading at just 11.5 times this year’s expected earnings. As the environment for drillers improves, those expectations should rise. Finally, the stock pays a $0.15 quarterly dividend. The yield isn’t extremely attractive, but it’s nice to collect some modest income while waiting for the stock to appreciate.
Atwood Oceanics: Aggressive international expansion
Atwood Oceanics Inc. (
NYSE: ATW) specializes in offshore drilling and is aggressively building out its international fleet. The company just closed on a $200 million note, which will help fund its global expansion. Last year, it raised $450 million in a similar offering to give the company working capital to build new rigs.
Over the last three weeks, Atwood has announced four separate contracts for individual offshore rigs that the company owns. As oil prices increase, these rigs will become more valuable, and analysts expect the company to be able to operate at full capacity with attractive pricing.
Analysts expect Atwood to grow earnings by nearly 25% this year and by another 20% in 2014. The stock is trading at 11 times expected earnings for 2013, which is a very attractive price given the company’s growth prospects.
Atwood does not currently pay a dividend because management is intent on reinvesting profits into its growing business. Considering the company’s expertise in offshore drilling, and the rising global demand for drilling rigs, a commitment to using capital for growth purposes looks like a very wise decision.
Drilling companies look attractive. As the global drilling environment improves, we will likely see one or two of these stocks become clear leaders within their sector.
When it happens, resist the urge to sell your biggest winner.
It’s likely that the leader is ahead because of the quality of the underlying company. Instead, reduce your exposure to the laggards, and continue to add shares to your best positions – while still moving your stop price up to lock in your profits.
https://www.investmentu.com/2013/June/drilling-stocks-take-advantage-of-high-oil-prices.html