High Oil Prices and New U.S. Oil Fields Spell Growth for Drillers

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 |  Includes: BHI, HAL, KEG, NBR, PDS, PTEN, RDC, SLB, SPY
by: David White

In December Light Sweet Crude Futures on the Nymex went over $90/barrel. In late February oil prices went over $100. They have so far peaked at $114.83 in 2011, and have remained in a range between $95 and the high since. More specifically WTI averaged $79+ for all of 2010. It averaged approximately $98 for the first 4 months of 2011. Drilling for oil is profitable in most cases in the $30-$70/barrel range. With oil averaging almost $30 higher than the top of that range, the drilling business is getting a huge stimulus. Further there is political unrest in the Middle East and Africa. There is the increase in demand (not equaled by supply) due to increased oil use by emerging economies. Prices are more likely to go higher longer term than lower.

On top of this the biggest economy (the U.S.) with by far the biggest oil trade deficit has discovered many new prolific oil fields. The Bakken field and the Eagle Ford field are perhaps the most famous recent fields. However, the new Tuscaloosa Marine Shale field may contain tens of billions of barrels of oil. These could be tapped with the same horizontal drilling techniques that made booms of the Haynesville Shale, the Bakken, etc. Plus shale gas production has more than doubled in the last three years. To put some example numbers to it, permits for the Eagle Ford shale increased from 94 in 2009, to 1,010 in 2010. It is forecast to continue rapid growth along with the oil. Some estimate that oil service drillers will have to hire 19,000 workers this year alone to keep up with demand. In fact this boost in employment may stop new competitors from entering U.S. fields, and it may lead to potential mergers and acquisitions (good for acquired stock prices). This means all of the big land based drillers should see great growth for many years to come. Recent profits from some of these drillers testify to the veracity of this situation. In their Q1 earnings reports, Halliburton Company (NYSE:HAL), Baker Hughes Inc. (NYSE:BHI), and Patterson-UTI Energy Inc. (NASDAQ:PTEN) all beat estimates. All are involved in the new US oil field plays. Analysts raised estimates for all three of the above stocks. In fact they raised estimates, especially FY2012 estimates, for most others that are involved (or likely to be involved) such as Schlumberger Limited (SLB), Nabors Industries Ltd. (NYSE:NBR), Rowan Companies Inc. (NYSE:RDC), Precision Drilling Trust (NYSE:PDS), and Key Energy Services, Inc. (NYSE:KEG). I may have left some out. These companies are all likely to be good long term investments for many years to come. Further Oil Service stocks on average outperform oil company stocks in boom years. Don’t think you are losing out by not investing directly in oil.

For now let’s just look at HAL, BHI, and PTEN. The table below gives fundamental financial data for each. The data is from Yahoo Finance and TDameritrade.

Stock

HAL

BHI

PTEN

Price

$50.28

$74.58

$31.00

1 yr. Analysts’ Target Price

$62.52

$92.26

$37.39

PE

21.42

29.82

26.23

FPE

13.09

13.89

11.44

Avg. Analysts’ Opinion

1.6

1.9

2.0

Price/Book

4.21

2.23

2.11

Price/Cash Flow

14.03

14.29

8.86

Short Interest as a % of Float

2.24%

1.49%

5.77%

Beta

1.4

1.5

1.5

5 yr. EPS Growth Estimate per annum

20.16%

27.45%

15.23%

EPS Growth Estimate for FY2011

46.60%

85.10%

198.60%

EPS Growth Estimate for FY 2012

27.20%

30.70%

26.00%

Market Cap

$46.01B

$32.42B

$4.75B

Enterprise Value

$47.95B

$34.86B

$5.10B

Total Cash/Share (mrq)

$2.06

$3.21

$0.25

Avg. EPS Estimate for FY2011

$3.02

$4.11

$2.15

Avg. EPS Estimate for FY2012

$3.84

$5.37

$2.71

Total Debt/Total Capital (mrq)

25.90%

20.58%

14.96%

Quick Ratio (mrq)

2.37

1.99

1.74

Interest Coverage (mrq)

11.80

12.31

30.56

Return on Equity (ttm)

21.11%

9.71%

8.47%

EPS Growth (mrq)

139.75%

111.54%

1594.47%

EPS Growth (ttm)

110.34%

116.34%

501.78%

Revenue Growth (mrq)

40.44%

78.22%

108.91%

Revenue Growth (ttm)

34.17%

72.00%

123.95%

Annual Dividend Rate

$0.36

$0.60

$0.20

Gross Profit Margin (ttm)

18.52%

22.14%

39.69%

Operating Profit Margin (ttm)

17.31%

11.21%

17.66%

Net Profit Margin (ttm)

10.78%

6.55%

10.54%

Net Insider Buying (last 6 mo.’s)

(731,322)

(792,138)

N/A

Net Institutional Buying (last 6 mo.’s)

(23,397,200)

(17,398,200)

(13,979,000)

Click to enlarge

All of these look like good investments. PTEN is estimated to grow the most in FY2011, but they all seem likely to even out their growth after that. BHI, which has the highest PE, is supposed to be the best long-term grower. HAL is likely the safest with 61% of its operations in the US (mostly land based). HAL has developed "green" fracking technology. HAL’s size gives it the safety nod over PTEN. Still all are worthy investments.

The 1 year charts may indicate more clearly when one may want to invest in these stocks.

The 1 year chart of HAL is below - (click charts to expand):

Click to enlarge 

The 1 year chart of BHI is below:

Click to enlarge

The 1 year chart of PTEN is below:

Click to enlarge  

All of the above charts seem to show the same pattern. They show a consistently rising price for each stock. They show recent consolidation. They show money starting to flow back into the stocks recently. This is an important point after the institutional selling shown in the table above for each stock. Unfortunately the Slow Stochastic of each stock shows each as over bought. This is bad if you are trying to buy in at the low. On the other hand these stocks are strong both technically and fundamentally. Any or all of them could break out of their consolidation phases soon. You might watch for this. Each has been consolidating since February 2011. It is a trader’s call to make the choice for himself or herself.

The overall market has been trending down since the beginning of May 2011. The SPY hit a low of $130.08 on Friday. It could bounce from there? Or it could continue further down. It would seem that a second Greek bailout has been mostly agreed to. Greece should be able to get a new tranche of bailout funds in early July. This will take the threat of an immediate term Greek default off the table. The markets may be relieved. They may bounce upward. Alternatively, the protests of further increased austerity by the Greek people may unsettle the markets. The markets may continue downward. If the SPY breaks through support at $129.51, it’s next good support is not until $125.28. Keep this in mind when you are deciding how much to buy and when to buy it. Averaging in is probably the best strategy. These stocks definitely look like good stocks to be in longer term. When you find a company the size of BHI with a 5 year EPS Growth Estimate per annum of 27.45%, you know you have a good stock. Plus it is in a good industry. The only question that now remains is how to enter the trade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.