Dividend stocks for income investors
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal
Recent articles:
• 5 more ways to invest for income, 12/6/2005
• My plan to rescue General Motors, 12/1/2005
• Globalization isn't what's killing GM, 11/29/2005
More...
| | Jubak's Journal
5 ways to tap into onshore drilling boom
Big oil and gas companies are looking onshore in the United States for oil and gas prospects for the first time in decades. These companies should benefit from all that spending.
By Jim Jubak
'Tis the season -- for oil companies to announce their budgets for drilling and exploration in 2006. And, if you're an investor in just the right oil service stocks, there may be a big surprise waiting for you: It looks like the big oil companies will be spending big bucks to find oil and, especially, natural gas in, of all places, the continental United States. The U.S. onshore drilling market is about to see its first growth cycle in more than 25 years.
Independent oil producers such as Forest Oil (FST, news, msgs) and super-majors such as ExxonMobil (XOM, news, msgs) have recently announced that they will reallocate their exploration and drilling dollars from international and offshore projects to the onshore market in the United States.
The focus of this new U.S. investment is the unconventional natural gas deposits in the Rocky Mountain states and in the Barnett Shale formation in north Texas. New technologies have made it possible to produce gas from the rock in these areas that couldn't be extracted before. Soaring natural gas prices -- futures prices in New York have doubled so far in 2005 -- have made it profitable to drill for and produce this gas despite the higher production costs of the new technologies. Add in the political factor -- producing natural gas in the United States doesn't present anything like the political risk of drilling in Nigeria or Indonesia -- and shifting capital spending towards the still largely untapped unconventional deposits in the United States is a no-brainer.
Drilling permit numbers are climbing
You can see the proof of this shift in the 24% increase in weekly drilling-permit numbers in the United States from October 2004 to October 2005. This pickup in drilling activity feeds through into higher prices for the scarce supply of land-based drilling rigs and for all the equipment needed for drilling and production. Spending on drill bits, for example, is up 24% for the first nine months of 2005 over the same period in 2004 and spending on pressure pumps and systems is up 28%.
Related news and commentary on MSN Money
The stocks of land-based drilling equipment and drilling service companies haven't had a bad 2005, but they have trailed their more glamorous off-shore brethren, where shortages of deepwater drilling platforms have sent day rates spiraling upward. A deepwater drilling specialist such as Transocean (RIG, news, msgs) is up 68% in 2005 (as of Dec. 6), while a land-drilling specialist such as Nabors Industries (NBR, news, msgs) is up only 48%. Over the next six months, however, I expect shares of the companies that sell land-based drilling services and products into the U.S. market to catch up as the story about the boom in U.S. exploration and production gets better known.
5 companies cashing in on onshore drilling
In my regular weekly appearance on CNBC's "Morning Call" on Dec. 7, I picked three stocks that will be primary beneficiaries of what I believe will be the first extended boom in land-based drilling in the United States since the 1970s and early 1980s.
Nabors Industries (NBR, news, msgs): Meet the king of land-based rigs in the United States and Canada. Nabors Industries owns almost 600 land-based drilling rigs and another 900 land-based work-over and servicing rigs. (The company also owns a relatively small fleet of off-shore rigs: 44 platform, 19 jack-up and 3 barge rigs.) That huge position in the land-based market gives Nabors big leverage from the current boom since the company's revenues and earnings climb as more rigs go to work at higher day rates. (Drilling companies charge for their services by the day.) In the third quarter, Nabors Industries had an average of 299 drilling rigs at work in the lower 48 states and Canada. That's up 22% from 245 at the end of 2004. Revenue per day from these drilling rigs climbed to $15,809 in the third quarter of 2005 for the U.S. rigs from $11,075 at the end of 2004, a 43% increase. Operating income per rig in the United States has climbed 190% since the fourth quarter of 2004, and the order book shows no signs of this trend coming to an end.
With the oil industry clamoring to drill in the United States again, Nabors Industries has announced that it will continue to put more of its idle rigs to work at a rate of about five to seven a month, and that it will build 100 new rigs by 2007. Within days of announcing the program to build new rigs, Nabors Industries reported customer commitments for 51 rigs that won't be ready for market until 2007. This sure doesn't look like the kind of rig building on spec that has crushed day rates in other shorter rallies. Wall Street analysts project that the company will grow earnings by 43% in 2006. The stock now sells at 12.8 times projected 2006 earnings per share. MSN Money's StockScouter stock rating system rates these shares a 10 out of a possible 10.
| |
|
|
|
|
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
|
