2 Drilling Plays In The Spotlight

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 |  Includes: HAL, PDS
by: Bret Jensen

Summary

The energy sector has outperformed the overall market in 2014. With high energy prices this should continue.

Land drilling plays are reporting good results and receiving upgrades.

Two of those stocks were in the spotlight this week and are highlighted below.

The energy sector has easily outperformed the market throughout 2014. This is not surprising given that natural gas prices are near four year highs and oil remains stubbornly over $100/barrel.

The only part of the market under pressure is some of the offshore drilling plays. Overcapacity and declining day rates have decimated the stocks in the sector with most falling 25% to 40% over the past six months. I believe this pullback is a long term buying opportunity and have a variety of positions in the space including Seadrill (NYSE:SDRL).

The land drilling sector is a different story. The space is in the middle of strengthening fundamentals. Plays in the space are beating earnings expectations and receiving analyst upgrades. This week one of the biggest North American land drilling plays, Baker Hughes (NYSE:BHI), reported results that easily beat expectations and sent the shares significantly higher. Margins were up 200 bps Y/Y.

Schlumberger (NYSE:SLB), the largest global oil services in the world posted results that slightly missed consensus but it reported strong North American drilling activity. This should bode well for Halliburton (NYSE:HAL) when it reports earnings early next week.

In addition to being a good short-term play, I like the long-term prospects of Halliburton. I have owned the shares since they traded at $30 a share. Even at over $60 a share, I still hold the shares. The consensus has Halliburton increasing earnings some 25% year-over-year this fiscal year and 20% in FY2015.

Revenues are posting increases in 8% to 10% annual range and the stock has a five year projected PEG of under 1 (.66). Halliburton goes for a reasonable 12x FY2015's projected EPS and pays a 1% dividend. As the largest North American energy services company, the huge energy production boom going on in the continent should remain a secular tailwind for some time.

Precision Drilling Corporation (NYSE:PDS) is a much smaller play in the space with market capitalization of just under $4B. The company operates over 300 land drilling rigs primarily in North America. About 60% of its rigs are located in Canada, 35% in United States with the rest in Mexico and beyond.

Revenues are increasing in the teens on an annual basis and the shares have a lower five year projected PEG (.41) than Halliburton. Earnings are projected to show sharp increases as well. Precision earned ~65 cents a share in the just completed fiscal year. Current consensus has the firm earning over 90 cents a share this fiscal year and over $1.10 a share in FY2015.

Precision Drilling Corporation was upgraded from "Underweight" to "Overweight" at Morgan Stanley this week. They also won some big new contracts in the Middle East and Mexico in March. The shares are not expensive at under 11.5x projected FY2015's EPS.

Disclosure: I am long HAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.