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With the price of oil hovering around $100 per barrel, investments for oil drillers are attractive and cash flow is increasing. The oil drillers have upward earnings revisions for 2012. However, analysts have mixed outlooks for these drillers in 2012.

Barclays has a positive viewpoint for the oil drillers in 2012. Barclays states that the energy supply is getting tighter worldwide. They also stated that hydrocarbon prices are at attractive levels for investment and are likely to rise and that cash flow and capex on energy investments are increasing rapidly. Barclays feels that the oil services and drilling companies will benefit from these factors.

However, Fitch has a negative outlook on the energy sector in 2012. Fitch cites that the risks to this industry are a decrease in global demand due to recession risks in Europe and the United States and a possible slowdown in China. Fitch further stated that the expectation of continued high capital spending will limit short term free cash flow.

Let’s take a look at the fundamentals of the oil drillers to see how they’re currently positioned:

Transocean

(NYSE:RIG)

Noble

Corporation

(NYSE:NE)

Diamond

Offshore (NYSE:DO)

Nabors

Industries

(NYSE:NBR)

Ensco plc

(NYSE:ESV)

Patterson-UTI (NASDAQ:PTEN)

Forward

PE Ratio

12.07

7.69

11.51

7.64

7.89

7.46

PEG Ratio

4.18

1.81

0.76

0.55

0.84

0.38

Dividends

8.2%

1.7%

0.90%

N/A

3%

1%

Operating

Cash Flow

$2.02 Billion

$843.12

Million

$1.41 Billion

$1.53

Billion

$720.4

Million

$779.13

Million

EPS

-1.25

1.35

7.31

1.38

2.92

1.84

Current

Ratio

1.54

1.54

5.18

1.8

1.21

1.6

Debt to Equity

53.24

47.82

35.11

76.38

47.82

16.93

# of Upward Earnings

Revisions

For 2012

5

10

12

4

7

1

5 Year Annual Expected Earnings Growth

5.81%

11.84%

11.3%

21.79%

17.89%

24.48%

Although recession risks remain in Europe and the United States in 2012, I don’t think that these drillers will do poorly in a five year period. Even if we were to enter a worldwide recession and these stocks lost 50% from where they are right now, stocks recover quickly as we saw in 2009 and 2010. So, if you keep a long-term viewpoint of at least five years, these companies should do well.

I don’t like Transocean’s (RIG) 5 year projected earnings growth; however its 8.2% dividend looks nice. Although it took a big hit in 2011, RIG now trades at $26 under its book value per share, making it a highly undervalued stock. When it does recover, the stock should get back to its book value per share of $65 rather quickly.

Noble (NE) is nicely undervalued as it trades at only 1.04 times book value per share. It should meet or exceed earnings expectations for 2012 as it had 10 upward earnings revisions. It’s expected to grow earnings at 174% in 2012.

Diamond Offshore (DO) is another undervalued driller as it trades at only 1.8 times book value per share. It has a solid balance sheet and rakes in the cash flow. It should have no trouble beating the market’s performance over the next five years.

Another undervalued driller is Nabors Industries (NBR). Its stock is currently trading at $2 under its book value per share. Although it doesn’t pay dividends, Nabors has high expected earnings growth. If it meets or exceeds these expectations, Nabors could double the market’s performance over the next five years.

The driller with the handsome 3% dividend is Ensco plc (ESV). It is also well undervalued as it currently trades right around its book value per share. It’s expected to achieve 90% earnings growth in 2012 and is expected to grow earnings annually at a healthy 17.89% for the next five years.

Patterson-UTI (PTEN) is another driller looking well valued as it’s now trading at only 1.27 times book value per share. Its operating cash flow is higher than its total debt. Patterson’s modest 1% dividend can be combined with its above average expected earnings growth of 24.48%. This is another stock that should double the market’s performance over the next five years.

Conclusion:

This group recently took a beating in the market. However, they will not be left for dead. They are all undervalued and poised to grow earnings over the next five years. This earnings growth will lead to higher stock prices. The earnings growth will come from increased demand for their drilling services.

I think that Barclays’ positive viewpoint for the drillers in 2012 will prove to be more accurate than the negative view that Fitch is portraying. Fitch is using the recession fear theory to paint a dismal picture for the driller’s outlook. However, it looks more like a global recession will be averted and that drilling demand will continue to grow in the near future. I think that the tide is turning for the drillers and it’s a positive turn.

Source: 2012 Outlook Is Mixed For Oil Drillers - What You Need To Know