5 energy stocks for a smooth ride - Jubak's Journal

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Posted 2/8/2006

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Jubak's Journal
5 energy stocks for a smooth ride

As the energy sector is buffeted by everything from geopolitics to weather forecasts, these companies continue to deliver solid profits.

By Jim Jubak

By now, investors should know the drill. Energy stocks soar to new highs on worries about supply disruptions from Iran, Iraq, Nigeria, Venezuela, Russia, wherever. Energy stocks crash, like they did on Tuesday, coming back to earth from those new highs, on news that warm weather has tempered demand and/or that inventories of oil, natural gas, or gasoline are climbing.

Boom. Bust. Boom Bust. In the short term. On news that is, in essence, noise.

In the long-term, though, each boom takes the stock to a new high that's a bit higher and each bust ends with the low that's also a bit higher.

As long as the long-term trend toward higher energy prices is intact, investors should use a sell off like Tuesday's as an opportunity to buy. As long as global energy demand is growing fast enough to force global energy suppliers to tap increasingly expensive sources of oil and natural gas -- drilling in deep, deep, deep water or mining and refining the oil sands of Canada -- the long term trend for energy prices, and energy stocks, is up.

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Charting a course
And how do you know that the long-term trend is intact? Not by watching the shares of energy producers: At this stage in the energy rally, they're so volatile they respond to every bit of news. No, instead watch the shares of the companies that supply the picks and shovels for continued energy exploration and production. As long as these companies continue to report rising orders and climbing revenue, then the long-term direction for energy shares and prices remains upward.

At this stage in the energy rally, these indicator stocks are also often the best stocks to own to reap latter stage profits as well.

To see the long-term trend that the short-term booms and busts tend to obscure, look at a chart, almost any chart, for a stock in the energy sector.
XTO Energy (XTO, news, msgs), among energy producers, shows exactly what I mean. It peaked in booms on Oct. 3 at $46.15, Dec. 15 at $46.95, and Jan. 30 at $49.95. It bottomed in busts on Nov. 10 at $38.72 and on Dec. 27 at $43.94.

End result: a $3.85-a-share, or 8%, gain from the Oct. 3, 2005 to the Jan. 30, 2006 high.

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Charts don't come with a guarantee that the trend won't reverse. The energy sector could break down technically if the current sell-off is deep enough to send a majority of stocks in the sector to significantly lower lows.

But the trends on the charts are backed up by fundamental trends that, in my opinion, make that unlikely.

For example, on the same day that most energy stocks went into their dizzying decline, Gardner Denver (GDI, news, msgs), a maker of pumps and compressors for the oil industry, reported earnings of 96 cents a share, almost 25% above Wall Street projections, on a 53% increase in revenue. And the company bumped upped its earnings guidance for 2006 by at least 6% or as much as 12%.

A huge contributor: demand from the oil industry for drilling and well-stimulation pumps. Orders at the company for that type of equipment were up 300% and 100%, respectively, in 2005. The market is so strong that the company is now taking orders for 2007. To prevent a re-run of 1982, when the market suddenly collapsed and customers cancelled orders right and left, Gardner Denver is charging an up-front fee to take any order. And even that hasn't quashed demand.
In my regular weekly appearance on CNBC's Morning Call on Wednesday, I recommended these three energy "indicator" stocks as buys on the pull-back in the sector:

Dril-Quip (DRQ, news, msgs). Dril-Quip gets its biggest surge in revenue relatively late in the oil drilling cycle, which makes this a good time to buy this stock. As drillers and service companies work through inventory and see their order book 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's vertical integration -- they make all the pieces that go into their sub-sea systems -- will start to kick in now that the company has sold its first integrated undersea systems, breaking into a $1.2 billion market that further increases the company's revenue opportunities over the next two to three years. Third-quarter results showed revenue growth of 64% from the same quarter in 2004 and a surge in operating margins of almost four percentage points. Order backlog climbed by about 15% in the quarter. Wall Street is projecting 46% earnings growth for 2006. At the end of Tuesday's sell-off, the stock traded at 23 times projected 2006 earnings per share. Our StockScouter rates the shares a 6 out of a possible 10.

Grant Prideco (GRP, news, msgs) Somebody has got to make the things that go into drilling rigs. In the markets for fill pipe, drill bits, and premium tubing and connectors, that somebody is often Grant Prideco, which controls nearly 50% of the drilling products market. The company's order backlog climbed to $814 million at the end of the fourth quarter -- not bad for a company that did $1.35 billion in sales for all of 2005. (The company reported earnings of 55 cents a share for the fourth quarter before the market opened Wednesday. That was 2 cents a share above Wall Street projections and represents earnings growth of 174% for the quarter.) Those orders fill about 80% of 2006 capacity, and the company has started to take orders for 2007. All that demand enabled the company to raise prices twice in 2005 with plans for another hike in early 2006. As a manufacturer with a high percentage of fixed costs, Grant Prideco sees earnings soar as volume and prices climb. That's why Wall Street analysts are projecting 2006 earnings growth of 50%. The stock trades at 19 times projected 2006 earnings per share. Our StockScouter rates these shares a 7 out of a possible 10.

Schlumberger (SLB, news, msgs). Schlumberger has spent the money to build out its capacity to serve the more challenging drilling and development environments that oil companies face as they expand their search for oil. And now Schlumberger is reaping the rewards. On Jan. 20, the company reported earnings per share of $1.05 for the fourth quarter of 2005, 10 cents and 11% above Wall Street expectations. For all of 2005, revenue climbed by 25%, and the company, which never ever gives guidance to Wall Street analysts and investors, said that shareholders could look for the same growth in 2006. Because Schlumberger invested before the boom in expanding its capacity to deliver everything from seismic surveys to drilling technology to oil fields, margins are now climbing. Wall Street analysts are calling for 47% earnings growth in 2006. The shares are trading at 24 times projected 2006 earnings per share. Our StockScouter rates these shares a 9 out of a possible 10.

Video: Jubak on Energy stocks for a smooth ride

And as always I have two "exclusive" picks for readers of CNBC.Com on MSN Money. Or, in this case, two stocks that I had earlier recommended for the longer 12-to-18 month time horizon of my Jubak's Picks portfolio. I find these especially compelling for the next six months -- the time horizon of my CNBC picks.

Nabors Industries (NBR, news, msgs). The U.S. onshore drilling market is seeing its first growth cycle in more than 25 years with a focus on drilling for natural gas in the Rocky Mountain states and the Barnett Shale formation in Texas. Higher rates for land drilling rigs have led to construction of more rigs, but delivery of those new rigs will be gradually added to the market between now and mid-2007. Nabors Industries is the king of land-based rigs in the United States and Canada, with more than 600 land-based rigs and another 900 land-based work-over and servicing rigs. Nabors will see the day rates it gets for its rigs continue to climb in 2006, with the peak, Morgan Stanley estimates, about 20% above current rates. Wall Street projects earnings at Nabors Industries will grow by 49% in 2006. The stock trades at 13 times projected 2006 earnings per share. Our StockScouter rates these shares a 10 out of a possible 10.

Noble (NE, news, msgs). Day rates for offshore drilling rigs are still climbing, and Noble has lots of leverage to those rising rates thanks to the timing of the contracts on its drilling rigs. Most of the contracts on Noble's Gulf of Mexico rigs end in the first half of 2006. With rates on fourth-generation floaters expected to climb in 2006 -- to $400,000 a day from the current level of $325,000 to $360,000 a day -- Noble has lots of upside leverage. Wall Street analysts project that earnings will climb 146% in 2006. The shares trade at 13 times projected 2006 earnings per share. Our StockScouter rates these shares a 9 out of a possible 10.

Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Nabors Industries and Noble. He doesn't own short positions in any stock mentioned in this column.

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.