Much has been said and written about lessening our dependence on foreign oil. But, after the massive disaster in the Gulf of Mexico last year, the country’s (or least the current administration’s) appetite for offshore drilling has been suppressed. This, consequently, has put the spotlight on companies that drill for oil and gas onshore. The high level of interest in these names is evidenced by the ~80% climb higher by the Oil Services HOLDRs ETF (OIH) since the beginning of June 2010.
Given that the situation in the Middle East is likely to remain in the headlines for some time, it seems probable that onshore drilling stocks may continue to find favor with investors and traders. In today’s report, we wanted to take a quick look at a few of these stocks that have been breaking out.
Get To Know Your Nabors
Nabors Industries (NBR) is the largest land drilling contractor in the world, with approximately 554 land drilling rigs in North America. NBR conducts oil, gas, and geothermal drilling in the lower 48 states, Alaska, Canada, South America, Mexico, the Middle East, Russia, and Africa. In addition to drilling, NBR also provides well-servicing activities, such as engineering, transportation, construction, and maintenance. Its primary customers are generally major oil and gas companies, as well as foreign national oil and gas companies.
Since late August, shares of NBR have been on a tear, up some 80%, to trade at new 52-week highs. Fueling the extension higher was its fourth quarter results on February 15, in which the company reported that EPS soared by 144% year-over-year to $0.44, for an easy $0.07 beat. Revenue was also markedly higher, up 59%. Furthermore, NBR commented that it expects to achieve a 50-60% increase in EPS in FY11, despite the fact that the first and second quarters this year will be negatively impacted by a few period-specific issues.
Quick Take: Overall, NBR represents one of the more attractive opportunities in this space due to its geographical and customer diversification and its proven track record. In regards to growth opportunities, NBR is poised to expand its "U.S. Lower 48" segment, as it secured six new build rig contracts last quarter. Interest for more new builds remains strong too, and will likely only increase as oil export prices climb. From a technical perspective, NBR may be running up against some resistance around the $28-$30 level. For a much more comprehensive look at its technicals, we urge you to check out our trading report on NBR, available by clicking on its ticker above.
A KEG Party
With a market cap of just over $2 billion, Key Energy Services (KEG) is a smaller play in the onshore drilling industry. However, it does operate in many of the major oil and gas fields in the U.S., and it also has operations in Mexico, Argentina, and Russia. Similar to NBR, it provides a comprehensive list of services to major oil and gas companies through its two operating segments: Production Services and Well Servicing. KEG operates a fleet of about 743 rigs, including rigs in the vast Bakken and Eagle Ford share markets – the largest land oil and gas reservoir in the mainland U.S.
KEG’s growth prospects look quite compelling as it forecasted revenue to be up 35-40% in FY11 to $1.56-$1.62 billion. The company has stated that it experienced the beginning of a significant cyclical recovery following the trough of 2009. Not only is KEG is well-positioned to benefit from the improving domestic market, but it also has expanded into two new international markets – namely, Bahrain and Colombia.
Quick Take: KEG’s growth prospects are intriguing, but with a forward P/E of 24.1x, its valuation is a bit richer than the other two stocks highlighted in the article. Looking at KEG from a technical perspective, we note that the stock is trading at its best levels since September of 2008. However, the incredible surge higher that began in early 2009 has put the stock at key resistance levels. Again, for a much more thorough take on its technical attributes, we suggest that readers review our trading report on KEG prior to entering a position.
The "Other" H-P
The H-P that we are discussing today doesn’t make computer hardware. Rather, this HP – Helmerich & Payne (HP) – is involved in contract drilling in the U.S. and certain international markets. Its domestic drilling program includes land located in states such as Oklahoma, Colorado, Texas, Utah, and Wyoming, among others. HP operates over 200 drilling rigs in the U.S., and has several land rigs in other countries, including Venezuela, Colombia, and Argentina. In addition to its drilling operation, HP also provides drilling equipment, rigs, personnel, and camps on a contract basis.
The company is also coming off a very strong fourth quarter in which it topped analysts’ top and bottom line estimates, with profits rising 59% from a year ago. HP’s outstanding quarter was bolstered by a substantial improvement in its rig utilization rate, at 84% compared to 62% in 4Q09. Not only was its utilization rate much improved, but the average rig revenue per day increased by $567.
Quick Take: Out of the three, HP may represent the best "pure-play" on land drilling in the U.S. With that said, it also might have the most upside relative to growing international sales. Another positive is that HP has a superior balance sheet versus the rest of the group with $173.82 million in cash and $350 million in debt, and the company also pays a quarterly dividend of $0.24/share. Shares of HP are have busted out to 52-week highs, and aren’t too far off from all-time high levels. To see if there is any potential resistance on the way up, please access our trading report which will provide all of the key entry and exit levels traders should be aware of.
As the revolts and turmoil continue to rage throughout the Middle East, the price of crude oil has been cruising higher. At last check, it was within an earshot of the benchmark $100/barrel level. What is particularly frightening is the fact that crude prices have made such a dramatic move even though the countries that have been making headlines are relatively small players in terms of total exports. For instance, Libya is currently listed as only the 15th largest exporter of oil. The fear, of course, is that these revolts continue to spread, turning the Middle East upside down. What would happen, for instance, if Saudi Arabia -- who is the largest OPEC producer -- were to become inflamed in upheaval? The answer isn’t a pretty one. Some analysts predict that crude would surge to $200/barrel or more, which would greatly threaten our economic growth.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.