Pacific Drilling: An Attractive, Contrarian Drilling Play

| About: Pacific Drilling (PACD)
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North American land drilling activity continues to be strong bolstering the fortunes of land drillers such as Halliburton.

In contrast, offshore drilling plays have been hit hard in the market over the past six months.

Pacific Drilling is one of those beaten down names that looks ripe for investment by patient contrarian investors.

North American land drilling activity continues to pick up. Both Baker Hughes (BHI) and Schlumberger (NYSE:SLB) posted strong North American results within their earnings reports. As I predicted last week, Halliburton (NYSE:HAL) the #1 player in the North American land drilling space delivered better than expected results when it reported this morning. The energy services giant beat the top and bottom line consensus.

As a result, the shares are powering higher by ~$2 a share in midday trading and are at a new 52 week high. I continue to like and hold the shares. With the S&P 500 projected to see 4% year-over-year revenue increases in 2014 and with the overall index selling for 16-17x forward earnings, Halliburton is still a bargain. Annual revenue growth is projected to be in the 8% to 10% annual range over the next two fiscal years and HAL goes for just over 15x forward earnings and just over 12x FY2015's consensus EPS.

Slightly over 50% of Halliburton's sales come from the burgeoning North American market and the firm should continue to ride the secular tailwinds of the huge domestic energy boom happening in Canada and the United States. It also could and should be a major player in Mexico as that country is finally opening up its energy industry after a decade of declining production.

It is important to remember how lousy sentiment was in the land drilling space less than a year and a half ago. I wrote about and purchased Halliburton at ~$30 a share when no one wanted to buy these bets on land drilling activity picking up.

The same lousy sentiment now is present in the offshore drilling space. Most names in the sector have declined 25% to 40% over the past six months due to concerns around overcapacity and declining day rates.

However, with oil stubbornly above $100 a barrel and major finds in deep water off Brazil, Africa and even the Gulf of Mexico as Mexico targets its bounty in the gulf in the coming years; this overcapacity is likely to be temporary. Contrarian long term investors should be building stakes slowly in this currently unloved space. Hopefully doing so leads to similar gains to what Halliburton and other land drilling plays have returned over the past 12-18 months.

I own and have highlighted long term bargains available in this sector such as Seadrill (NYSE:SDRL) and Transocean (NYSE:RIG) recently. I would like to turn my attention to a smaller offshore play named Pacific Drilling (NYSE:PACD). Pacific has just over a $2B market capitalization and is based in Luxembourg.

Pacific Drilling has a fleet of 5 of the newest ultra-deepwater drillships in service. Two additional drillships are under construction at Samsung Heavy Industries for delivery in 2014. An eighth rig is under construction for delivery in March 2015. It is the only offshore drilling play with an exclusive and modern ultradeepwater fleet.

The company currently has a drilling backlog of over $3B. Pacific's projected EPS trajectory is impressive for a stock currently selling at ~$10 a share. The company booked EPS of 43 cents a share in FY2013. However, earnings are projected to almost double according to current consensus to 80 cents a share. Over $1.30 a share in the black is expected in FY2015.

The company does carry a high debt load which should be expected given their current construction schedule. Reassuringly 99% of possible drilling days for the fleet are already contracted for in 2014. 68% of 2015's drilling schedule is also already spoken for.

The shares go for just over 7x FY2015's projected EPS. The shares sell for ~90% of book value and the stock has a minuscule five year projected PEG (.11). Sentiment is too negative on Pacific given it has easily beat bottom line earnings estimates for 6 straight quarters. Patient contrarian investors should have this stock on their radar. BUY

Disclosure: I am long HAL, PACD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.