Oversold Land Drillers/Servicers Ready to Rally

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 |  Includes: BHI, HAL, NBR, PTEN, SLB
by: David White

There's a plethora of oil shale plays in the U.S. The two most mentioned are the Bakken and the Eagleford. However, there are others such as the Niobra, the Tuscaloosa, the Marcellus, the Haynesville, the Barnett, etc. The most recent ones are being tapped for oil and other liquids more than gas. Oil and liquids are a lot more lucrative to developers at today‘s prices. Some of the recent plays have barely begun to be developed. However, they represent a lot of work for drillers/servicers now and in the future. As an example, in the Eagleford, the 94 drilling permits issued in 2009 soared to 1,018 permits issued in 2010 through November. The number is expected to grow again in 2011.

Oil recovery in these shale plays invariably involves high numbers of fracking operations. Sometimes there are as many as twenty. In the last year, the oil well completion work backlog has approximately tripled. With all of the new shale plays, the completion work is still growing. Even the drilling work has increased by about 20% in the last year. The number of oil service employees is set to grow by approximately 1/3 this year. Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI) and Slumberger (NYSE:SLB) are the largest providers of fracturing services in the U.S. They are all set to grow significantly. Halliburton may turn out to be the best bet. It is well known for its green fracturing technology. When some projects are being held up by the worries about ground water contamination (the Tuscaloosa Marine Shale), being an expert in green fracturing technology should be a huge asset.

The market has trended down over the last two months. The land drillers/well servicers have reluctantly followed it. The drillers got an extra nudge downward when the IEA announced the release of 60M barrels of oil from SPR (30M from the U.S. SPR). This was designed to knock some of the speculators out of the market. It was designed to diminish the spread between the WTI and Brent. The EU needs all the help it can get given its current credit crisis. Oil prices reacted as expected by falling. They now sit at about $90/barrel. Some think they will rally from here. Some think they will fall further to $85 or even $80. Regardless, the price of oil will be more than high enough to encourage oil companies to drill. Even the most expensive deep sea drilling is supposed to be profitable at a price of $70/barrel or more. At $90-100 (or even $80-90), it is guaranteed to be profitable. The huge extra amount of work available from the new shale plays guarantees that the prices of the service providers will rise (on greater demand). The drillers/servicers cannot fail to profit.

The fundamental financial data from HAL, BHI, and SLB are in the table below. I have added Patterson-UTI Energy inc. (NASDAQ:PTEN) as a fourth company likely to profit. The data are from TDameritrade and Yahoo Finance.

Stock

HAL

BHI

SLB

PTEN

Price

$46.23

$68.14

$80.64

$27.72

1yr. Analysts’ Price Target

$62.87

$92.48

$106.66

$37.44

PE

19.70

27.25

23.12

23.45

FPE

11.95

12.60

15.75

10.19

Avg. Analysts’ Recommendation

1.6

1.9

1.9

2.0

This Year EPS Growth Estimate

46.60%

86.50%

30.40%

198.60%

Next Year EPS Growth Estimate

28.10%

30.70%

37.30%

26.50%

5yr EPS Growth Estimate per annum

20.16%

27.45%

18.66%

15.23%

EPS misses in the last 4 quarters

0

1

1

0

Avg. EPS beat % in the last 4 quarters

+14.30%

+12.475%

+0.95%

+29.15%

Stock Price Appreciation % YTD

+13.45%

+18.94%

-3.60%

+27.15%

Price/Book

3.87

2.01

3.48

1.89

Price/Cash Flow

12.9

12.89

15.0

7.94

Beta

1.47

1.46

1.26

1.62

Short Interest as a % of Float

2.57%

1.77%

1.04%

5.27%

Cash per Share

$2.06

$3.21

$3.07

$0.25

Market Cap

$42.30B

$29.62B

$109.42B

$4.25B

Enterprise Value

$43.91B

$32.06B

$114.25B

$4.70B

% Held by Institutions

80.39%

84.99%

76.26%

88.06%

Total Debt/Total Capital (mrq)

25.90%

20.58%

21.40%

14.96%

Quick Ratio (mrq)

2.37

1.99

1.36

1.74

Interest Coverage (mrq)

11.8

12.31

17.96

30.56

Return on Equity (ttm)

21.11%

9.71%

17.86%

8.47%

EPS Growth (mrq)

139.75%

111.54%

24.13%

1,594.47%

EPS Growth (ttm)

110.34%

116.34%

59.19%

501.78%

Revenue Growth (mrq)

40.44%

78.22%

54.49%

108.91%

Revenue Growth (ttm)

34.17%

72.00%

41.91%

123.95%

Annual Dividend Rate

$0.36

$0.60%

$1.00

$0.20

Gross Profit Margin (ttm)

18.52%

22.14%

24.16%

39.69%

Operating Profit Margin (ttm)

17.31%

11.21%

17.20%

17.66%

Net Profit Margin (ttm)

10.78%

6.55%

14.16%

10.54%

Click to enlarge

These are all investible. Nabor (NYSE:NBR) is another of the same vein with an FPE of 9.23. I like HAL best. Its attention to environmental details is bound to pay off in the long term. BHI and HAL have already been growing strongly. This gives credence to analysts’ longer term estimates for their performance. PTEN has performed well too, but it lacks the stability of BHI and HAL. SLB and NBR are slated to grow a lot. This is believable given the current market situation. However, it is a bit harder to believe the analysts estimates for companies that have been struggling recently.

The two-year charts below show the recent performance and some technical data.

HAL

[Click all to enlarge]

Click to enlarge

BHI

Click to enlarge 

SLB

Click to enlarge 

PTEN

Click to enlarge 

The Slow Stochastic sub chart of each shows each is oversold or just starting to bounce upward from oversold levels. This week is the end of the quarter/beginning of the next quarter. It is the time portfolio managers select strong stocks for their portfolios. They want their portfolios to look better for their reports. These four stocks likely qualify for “window dressing” additions to portfolios. In addition, their strong growth outlooks mean the managers will likely be able to retain them longer term. HAL, BHI, and PTEN especially fall into this category. They are likely to be added by managers this week. They have been consolidating recently, so they should have upside before long. All three have strong charts.

SLB is a known leader. It can be bought on analysts' growth estimates and SLB’s long term good reputation. It is unlikely many managers would be embarrassed to show SLB in their portfolios. This further up edge is likely to help these stocks all rally from their recent lows. You can start legging in now for a longer term position. Alternatively, you can sell “out of the money” July puts on one or more of these stocks. If the stock gets put to you, you will have gotten in at a good discount. If the stock is not put to you, you will get to collect the premium for the options without ever owning the stock. My personal preferences at this time are HAL and BHI.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HAL, BHI over the next 72 hours.