By Chad Tracy
At StreetAuthority, we've been paying a lot of attention to the energy renaissance currently happening in the United States.
It's an exciting time to be an investor in the energy sector. The country's oil and natural gas reserves are so big, the United States could soon become the world's largest oil producer. The Associated Press has released a report saying the United States could in fact pass Saudi Arabia in terms of energy production as soon as 2020.
Needless to say, investors who make smart investments now could see windfall profits during the next decade.
This is why Game-Changing Stocks expert Andy Obermueller says we are at the beginning of a "North American Energy Boom." He has done extensive research on this topic, and subscribers who took his advice back in May 2012 and bought shares of Cheniere Energy (LNG) are up more than 40% on the recommendation.
However, some investors are still skittish about investing in this highly competitive industry. With good reason, they worry about energy companies' ability to maintain profits when commodity prices fall.
But the company I'm going to tell you about today is not an oil and exploration company, a pipeline company or a refiner. National Oilwell Varco Inc. (NOV) is a "pick-and-shovel" play that provides the drilling equipment used on land-based and off-shore rigs.
This company is so dominant in its field that it has garnered a "wide economic moat," which is rare in the energy sector. Put simply, the barriers to entry and lack of meaningful competition give this company a huge competitive advantage over its peers.
Here's the story…
This company's equipment is on 90% of the world's oil rigs. In fact, according to Morningstar, "a rig cannot be built in the Western world without using some components from [this company]."
And the demand for new oil rigs, especially deep-water rigs, is skyrocketing. In the past, this company would deliver about three or four new deep-water rigs per year, each costing roughly $500 million. Today, demand is up to 20 new rigs a year and shows no signs of slowing down.
"Demand for ultra-deepwater rigs is at unprecedented levels as sustained high oil prices, coupled with operators' desire to achieve production targets, is driving demand higher in essentially every region," a recent Barclay's Equity research report said.
In 2012, rig technology orders for this company were $9.4 billion compared with $3.9 billion in 2010. In fact, new orders increased to such a degree that the company's backlog just hit a record high at $11.86 billion.
The company posted $1.6 billion in free cash flow last year, up from $1.3 billion the year before. Earnings for the fourth quarter of 2012 were also strong, up 16% from the previous quarter, topping analyst's expectations.
Best of all, I believe shares of National Oilwell Varco Inc. are currently undervalued at today's prices. Shares are selling at a forward price-to-earnings (P/E) ratio of 9. This is a steep discount to its peers, which currently trade at a forward P/E of more than 18.
The company has also increased its dividend payout steadily since it started paying quarterly in 2009.
Risks to Consider: Some analysts are concerned that competitor Cameron International Corp.'s (CAM) recent success could be a threat to National Oilwell's economic moat.
Any future disasters like the Deepwater Horizon oil rig explosion in 2010 could have a devastating effect on the stock.
Shares of National Oilwell started the year strong with a run-up to $74 before pulling back to today's price around $68. I believe this is a good entry point for investors. Buy the stock under $69.