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I have spent a good portion of the last month researching, writing about and accumulating positions in the energy and basic materials sectors. These sectors were brutalized in the last half of 2011 and many equities were left selling significantly under fair value and analysts’ price targets. These sectors also have less opaque prospects than financial services, which was the other major underperforming sector in 2011. Here are two drillers that I believe offer compelling valuation and large upside in 2012.

Patterson – UTI Energy (NASDAQ:PTEN) –

Patterson-UTI Energy, Inc., through it subsidiaries, provides onshore contract drilling services to oil and natural gas operators. The company offers pressure pumping services that consist of well stimulation and cementing for completion of new wells and remedial work on existing wells in Texas and the Appalachian Basin; and contract drilling services primarily in Texas, New Mexico, Oklahoma, Arkansas, Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North Dakota, Pennsylvania, West Virginia, and western Canada.

(Business description from Yahoo Finance)

Performance 6months*: -33.42% Current Price: $19.98 Consensus Price Target: $29

*Compared to S&P

Key value observations on PTEN:

· The company is selling in the bottom third of its five year valuation based on P/E, P/S, P/B and P/CF.

· S&P expected PTEN to average 49% EPS growth annually over the next three years.

· The stock has a five year projected PEG of .38, a 70% discount to its five year average.

· The stock is selling significantly under analysts’ price targets. The consensus price target on Patterson is $29, around 50% above current levels. Credit Suisse has an “outperform” rating and a $33 price target on PTEN.

Baker Hughes (NYSE:BHI) –

Baker Hughes Incorporated supplies wellbore related products, and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the oil and natural gas industry worldwide. It also provides products and services to the downstream refining, and process and pipeline industries.

(Business description from Yahoo Finance)

Performance 6months*: -28.95% Current Price: $48.64 Consensus Price Target: $76

*Compared to S&P

Key value observations on BHI:

· EPS is sharply accelerating. Baker Hughes earned $2.22 in FY2010, should log $4.32 a share in FY2011 and is projected to make $5.54 in FY2012.

· The stock looks like it is building technical support at $45 (See chart).

click to enlarge

· The stock has a five year projected PEG of just .36, a 65% discount to its five year average.

· The median analysts’ price target on BHI is $76. Credit Suisse has an “outperform” rating and a $80 price target on Baker Hughes.

Disclosure: I am long BHI.

Source: 2 Drillers That Will Make Investors Happy By Year End 2012