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Oil backlash? These 5 drillers will still find profits
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Prices down, earnings up: time to buy
Which is why the recent dip, small though it is, in the price of oil drilling and service stocks -- in sympathy with the drop in the price of oil -- is a good opportunity to buy. Earnings, which are likely to explode for the oil service and drilling companies in the third quarter, haven't peaked by any means, and the dual pressures of higher prices and noisy politicians have just pushed the peak of the revenue cycle for these companies further into the future.
In my Wednesday morning appearance on CNBC's Morning Call, I recommended these three drilling and service stocks:
Weatherford International (WFT, news, msgs) is making the transition from a drilling services company focused almost exclusively on North America to one with a major presence in Europe, the Middle East, and Asia thanks to its acquisition of Precision Drilling. That deal, which closed on Aug. 31, also brought Weatherford 48 land rigs: 33 in the Middle East, 10 in Mexico and 5 in Venezuela. Revenue from these rigs should double by this time in 2006 as utilization and day rates rise. But the advantages of the deal don't end there: Precision had developed new directional drilling technology that promised to give the company a foothold in markets now dominated by the big three service companies of Schlumberger (SLB, news, msgs), Halliburton (HAL, news, msgs), and Baker Hughes (BHI, news, msgs). That technology should gradually enable Weatherford to expand into new markets. The stock now trades at 23.9 times projected 2005 earnings per share and at 17.6 times projected 2006 earnings. Our StockScouter rates the shares an 8 out of a possible 10.
Dril-Quip (DRQ, news, msgs) gets its biggest surge in revenue relatively late in the oil drilling cycle, which makes this a good time for this stock. As drillers and service companies work through inventory and see their order books fill up, they place more orders for Dril-Quip products such as specialty casing connectors, mud line suspension systems and sub sea wellhead connectors, where Dril-Quip owns about 30% of the market. The company has doubled its manufacturing capacity since 1998, the last peak in the oil drilling cycle, and now has the capacity to deliver about three times as much revenue as it did that year. Dril-Quip has just sold its first integrated undersea system, breaking into a $1.2 billion market that further increases the company's revenue opportunities over the new two to three years. The stock now trades at 32.3 times projected 2005 earnings per share and 21.9 times projected 2006 earnings. Our StockScouter rates these shares a 7 out of a possible 10.
Ensco International (ESV, news, msgs) is a buy on the timing of the contracts for its fleet of 43 jack-up rigs. Only 39% of its fleet is under contract through 2006. In times of weak demand, that would be a problem because investors would be rightly worried about how many of those new rigs would wind up hired and at what rates. But with ocean drilling rigs in very short supply, the lack of contracts becomes a plus because it will allow Ensco International to sign 61% of its rigs to contracts at higher day rates. For example, the company recently signed a new contract with Saudi Arabia's Aramco at a day rate of $81,000, up from the mid-$50,000 range for the old contract. The shares now trade at 23 times estimated 2005 earnings per share but at just 12.6 times estimated 2006 earnings. And there's a good chance, in my opinion, that the Wall Street consensus on 2006 earnings is low. (My own estimate is 25 cents a share higher than the current consensus, for a 2006 forward PE of 11.6). Our Stock Scouter rates these shares a 9 out of a possible 10.
And, as always, I have two more exclusive picks for readers of CNBC.com on MSN Money.
Transocean (RIG, news, msgs), as a deep-sea drilling specialist, should reap the benefits as the oil industry goes ever deeper in its search for new oil. For example, in a recent sale of Gulf of Mexico leases, rights to the deepwater blocks sold for a record of $202 million, with the ultra-deep block accounting for 48% of total deepwater bids. The backlog for deepwater rigs has continued to climb, rising to 6,134 rig months on Sept. 9, according to Friedman Billings Ramsey, up 10% from the Aug. 5 level. Right now, 2006 is sold out. The Wall Street consensus projects earnings growth at Transocean at 438% in 2005 and at 143% in 2006. I think the 2006 projection, especially, is probably low. The P/E of 34.8 on projected 2005 earnings drops to 13.8 on projected 2006 earnings per share. Our Stock Scouter rates the shares a 7 out of a possible 10. (Transocean is a current member of my Jubak's Picks portfolio.)
Cooper Cameron (CAM, news, msgs) acquired Dresser's valve business for just $224 million (or about 0.5 times projected 2005 sales) at the beginning of September. That deal will just about double the size of Cooper Cameron's value business, just in time for orders for post-Katrina rebuilding and to catch the same late-cycle wave as Dril-Quip. The stock now trades at 24.8 times projected 2005 earnings per share of $2.89 and 19.2 times projected 2006 earnings of $3.68. Our StockScouter rates these shares an 8 out of a possible 10.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Transocean. He does not own short positions in any stock mentioned in this column.
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