Ensco International and Oilsands Quest: Two Diverse Energy Bets

First of all let me assure you I own both these stocks (one in the form of LEAPs), but for different reasons.

I'm speaking about Ensco International (ESV) and Oilsands Quest Inc. (BQI). Yes, they both are in the energy arena and they both have a great deal of upside potential.

Yet only one, ESV, is what I'd call a "value play." Here's a company that provides offshore contract drilling services to the oil and gas industry and is selling for only 10 times this year's earnings...and it is the kind of company that could have an earnings surprise on the upside this quarter or next!

Take a look at the 6 month chart below, compliments of Yahoo! Finance. Since February this stock has had an impressive run.

If you look at its giant peers like Schlumberger (SLB) and Transocean (RIG) you will see that its PE ratio is closer to RIG on the bottom side. ESV is more akin to RIG than SLB, and in all fairness I should compare it more to RIG and to Diamond Offshore (DO).

Speaking of DO, it is selling for almost 20 times this years earnings, almost twice as much as ESV. Forward earnings comparisons are similar, but the ESV forward PE ratio is almost 20% lower than DO.

Both ESV and DO are still selling above their 200-day moving average and are well off their 52-week highs. The same could be said for Oilsands Quest (BQI).

BQI is a different, smaller breed of cat. It is a Saskatchewan and Alberta oil sand company that recently became well known after the likes of Jim Cramer began touting it.

Here is its one year chart along with the 200-day moving average. Quite amazing too!

The company, formerly known as CanWest Petroleum Corporation, was founded in 1998 and is based in Calgary, Canada. As Matt Badiali who edits the S&A Oil Report recently wrote concerning BQI:

Roughly 100 companies own a little more than 30,000 square miles of Alberta oil sands.

Doing a quick calculation suggests each company holds, on average, about 300 square miles or 1% of the total.

But, of course, that fails to account for the large tracts held by companies, like Suncor (SU) and Syncrude, which dominate the total area. So really, most of those 100 companies hold much less than 300 square miles.

At the same time, that land is increasingly valuable. Companies are willing to squabble over the seemingly small patches they own.

For instance, Ivanhoe Energy (IVAN), a newcomer to the tar sands, bought about 37 square miles of leases from Talisman Energy (TLM) for a whopping $105 million. That works out to $2.8 million per square mile of undeveloped tar sand leases.

Oilsands Quest owns about 1,200 square miles of tar sands – much, much more than the typical oil sands company.

On top of that, if we use the Ivanhoe/Talisman deal as a benchmark, Oilsands Quest is worth about $3.2 billion. That value is 163% higher than its current price.

With that in mind, there is a strong argument why this could be considered an energy growth play with a hidden kicker for upside valuation in the future.

That would be especially true if they get on the fast-track to production, and they seem to be well on their way.

The company recently reported that positive results of advanced laboratory testing and computer simulation studies support the company's reservoir field test program using steam-based production methods that have been scheduled for late summer 2008 at Test Site 1.

These results are another step toward full commercial project development, including assessment of a "fast-track" approach to a first prospective project. Emphasis though should be placed on the world "prospective."

BQI is speculative and in the past year alone we've seen the price go up almost 270%. At it's closing price on 7/9/08 of $5.63 it is still not down much from its all-time recent high (52-week high) of $6.38 per share.

If you are thinking about investing in BQI you might want to consider an incremental approach. If you were to buy some now (I recently purchased my first position the other day at $5.48 per share) you might buy only half of your normal position amount.

This way if it corrects much more on one of those fierce, down days in the marketplace you can buy another helping at hopefully a much lower price.

We all need to keep in mind that stocks which trade below $10 per share can often times be painfully volatile and unpredictable. Yes, there might be lots of upside IF the company can get its act together and into high gear quickly.

Frankly, companies and stocks like BQI are more likely than not to scare the heck out of a trader or an investor, and in this bear market, are more likely to go down than up in the short-term.

The same could be said for a solid, cashed-up company like Ensco, especially after the fine run-up it has had over the past 6 months (see chart above).

Both ESV and BQI have little or no debt, but that is where the similarities in their key statistics end. ESV has total cash (mrq) of $670 million. They have operating cash flow (ttm) of $1.11 billion and a rich, levered free cash flow (ttm) $556 million dollars.

Of the two, I'd consider ESV to be the company that is "at the right place, at the right time, with the best experience, and the best leadership."

So put your "safer investment money" in companies like ESV, and put your "high risk- high return, speculative money" in companies like BQI.

Keep in mind that the current "enegy correction phase" might not be over, and you may have better opportunities for purchase over the next 6 to 8 weeks, so keep some of your powder dry.

Comments

[800LBGORILLA]

ESV will also have a brand new deepwater fleet over the next few years.Alot of the other drillers will just be adding age to their already old fleets.Not really knocking the others,but like ESV the best.These compainies are all too cheap,even DO, with their 20+ p/e.The 20 p/e should be the low mark,not the high.As far as BQI goes,I keep an eye on them but not invested in them as of yet.No paydirt yet.

[NLFEnergy]

You have to be careful when comparing ESV to RIG, DO, or NE for that matter, they don't have as much deepwater exposure as those last three do. Jackup rates have been depressed recently (especially in the Mexican and South East Asian markets) due to spec building coming online from smaller competitors. I like ESV a lot, but I would definitely own the other three companies first with NE being the best option for sure.

[False Profit]

Agree, ESV is good value at this price. If you'd like to hedge it, HP looks overvalued at 17x EPS and negative free cash flow.

[starkoski]

Good article. I own BQI and it makes sense to own it considering that Suncor is located a bit to the west of their land and Peak Oil will eventually make any stock with "tar sands" exposure rocket up just like the internet stocks in 98. It does have fundamentals too.

[fireball]

what about atwood? just trying to figure out which way to go here. i have a small position in bqi which i do want to increase.

[fireball]

sorry just woke up. thanx to the author. a helpful article.

[fireball]

what about the oilsands shale on this side of the border? any explorers comparable to bqi? that opening this morning was more fun than a bucket of cold water and a slap in the face. if it was not connected to oil it was down at least from my perspective. wide awake now.

[800LBGORILLA]

Lets compare drillers.ESV will have a new deepwater fleet within the next few years.Has some of the best jackups already.DO has 29 or so rigs,but are almost all shallow depths and very old.NE has some new deepwater rigs but has more than half at 20+ years old.RIG has the most,nice deepwater fleet and most are newer,but has a large fleet of old and shallow rigs as well.The 20+ year old rigs cant last forever.

[MarcCourtenay]

Thanks for your comments. Very helpful feedback. Atwood Oceanics is a good choice on pullbacks. This is a small oil and gas driller in the offshore market that owns and operates eight premium offshore rigs. Their mixed fleet includes four semi-submersibles and two premium jack-ups. Semi-submersibles are deep-water rigs that can drill down to 25,000 feet or more. As of November 27, 2007 ATW owned and operated eight offshore mobile drilling units located in six regions of the world, including offshore Southeast Asia, offshore Africa, offshore India, offshore Australia. Their numbers look good, but they sell for almost 5 times book value vs. ESV at less than 3X. If ATW falls below 90 I'd be a buyer unless the news was bad. Again, thanks for the comments. Marc

[chuckels]

I have owned BQI since before it was canwest. It was a uranium name. It has the land, it is progressing, It never has made any money! My original purchase price was .38 a share so I am a happy camper. I like connacher much better from an investment point of view. They have great property. They have gas plays and a refinery as well. They have excuted on a multiyear development plan and are pioneers in sagd oil sand develpment. Most important is the fact they are doubling there production and reserves while cash flow positive and MAKING MONEY!

[fireball]

chuckels wow. congrats. u should be chuckling. bqi is up a little over a dollar for me so i am smiling but some days my smile falters a little. is connacher on the american exchanges? sounds very interesting. MARK thank you for the info on a.o.. i thought i might have missed the boat on that one. thanx again for a most helpful article. my biggest holding is bhp. i like the dividend and they are about a double for me right now excluding dividends. i like their broad spread in metals and energies and their cash reserves. a couple of things that have finished well for me are ngs and io. i try to keep a close watch on them to get back in if they pullback enough or if the market pulls them down enough. i have heard but do not know if it is true that bhp sits on a huge stockpile of uranium as an added bonus. supposedly they are just waiting on the australian government approval to start selling it to china. that is rumor to me right now. 800lbGORILLA thank you and NLFEnergy for helpful input.

[chuckels]

Fireball, connacher is cll.to, or US cllzf.pk. They have an excellent website with lots of info.

[chuckels]

Fireball, conacher is on the toronto echange (cll.to) and pink sheets cllzf.pk in the US. They also have an excellent website with tons of info to review.