And hey, if you’re looking for a newsletter about energy stocks maybe that’s fine for you. From the two teasers I’ve seen from Gue so far we’ve got Novozymes, which is up about 10% as of now, and Unor, which is a microcap uranium play that’s way down. Certainly not enough to judge him, and I don’t know what his overall record has been.
For me, I’m just curious to see what those four ideas are …
His basic argument is a familiar one — the boom cycle in oil and gas services isn’t coming to an end anytime soon, and the drillers and service companies are, for the most part, cheap. I more or less agree with him on that, though my opinion is just an opinion — and not a terribly informed one.
But inclined though I am to blather on for a bit, we should get to business here — there are four stocks to uncover! Hopefully, I’ll be able to soldier through for you.
Bargain Driller #1:
“Headquartered in Bermuda with most operations controlled out of Houston, this company is the world’s largest contract land driller with a total of more than 600 land rigs operating worldwide.”
OK, you know what? He says a lot more about this company, too — that they’ve got good financial management, lots of earnings visibility, growing international presence, and they’re beaten down a bit because of domestic natural gas exposure … but really, that sentence above is the only one we need to identify that this company must be …
And it’s hard to poke holes in the argument for this one — NBR is cheap, though it has also been cheaper before. It trades at a single digit PE, and a forward PE of only about 7. The company is indeed exposed to natural gas through its big US land drilling business, so that’s either positive or negative depending on how you predict the future, but it’s certainly one reason why the shares are somewhat depressed.
The CEO, Gene Isenberg, is quite old at 77 and pays himself and the COO an unusually obscene amount of money, but that doesn’t seem to scare many folks off. He has certainly led the company to dramatic growth over the years.
Nabors is a very familiar company for anyone who keeps up on the business news, and it’s a big one — their market cap is around $8 billion, and well-known value hounds like Marty Whitman of Third Avenue hold shares, so Gue is in pretty good company. If I remember correctly, it was also a Jim Cramer favorite last year .. though I don’t know how he feels about it at the moment. There was a profile of Nabors as a value stock just last week in Barron’s, too.
Bargain Driller #2:
This is a deepwater driller that’s based in Europe, which narrows the universe for investigation pretty nicely.
Gue says, “My prediction — the rates for this European deepwater oil driller will top $1 million per day by 2012. It’s perhaps the most-aggressive drilling contractor anywhere in the world today.”
The firm has rigs on the water earning money right now, but Gue says their real value is in their newbuilds that will be delivered over the next few years.
“The company has a total of two drillships and seven deepwater semis on order … the first new rig is scheduled for completion in the fourth quarter of 2007. That rig is signed up on a contract with Total at a day-rate of $480,000 starting in the first quarter of 2008.”
Several other clues are provided about the fleet and about their availability for contracts:
New drillship and semis are already under contract beginning in the middle of next year at 520,000 and 460,000 a day.
They have five deepwater rigs available in 2008 that haven’t yet been contracted, which is a lot for an in-demand market. Gue says this is “More rig availability than any other company on Earth.”
And finally, this company is an acquirer. They’ve considered buying a big US-based driller, and “the company believes it could target an acquisition of as high as $16 billion by taking on more leverage.”
Gue is looking for 50% more in gains from this one in the coming year, so if you like that idea you might want to investigate this recommendation … which I’m pretty sure is …
Seadrill (SDRLF.PK, SDRL in Oslo)
This one is a little bit like cheating for me, because Seadrill is actually the largest individual stock holding in my personal portfolio. And while his contract numbers don’t mesh exactly with what I’ve seen Seadrill report, they’re very close and the report I’m going off of is several months old. Seadrill does have many newbuild rigs still available for contract in 2008, which is one of the things that appealed to me about the company — looks like two deepwater jackups and three semisubmersibles from the data I’ve reviewed. They also have some coming off of shorter contracts in the next year or two that seem likely to get big increases in their dayrates, and they’ve ordered several more deepwater rigs and drillships for 2010 delivery.
If you’re interested in looking in to this one, here’s my thinking in a nutshell (sorry, but when I run into a stock that I hold I’m more likely to babble on about my opinion instead of my usual noncommittal comments … prepare your grains of salt accordingly):
Seadrill is controlled by John Fredriksen, the famous “viking raider” and wealthiest man in Norway … though I think he’s officially a Cypriot for tax reasons now, and a London resident. He built the world’s largest publicly traded supertanker fleet in Frontline, and my feeling is that he’s doing the same thing with Seadrill that he did with Frontline — building a dominant company with large market share at an opportune time in the business cycle, and potentially harvesting cash from the company through heavy dividends in the years ahead. He has shown a tendency to hold major portions of his companies, roughly 35%, and to use dividends to return cash to himself and his fellow shareholders. For Fredriksen, it seems, it’s all about cash flow that can be returned to shareholders — not necessarily about reported earnings (especially because both rigs and ships tend to get huge depreciation writeoffs).
Fredriksen spun off a financing company from Frontline, called Ship Finance (SFL), and used it to offload the Frontline fleet from his balance sheet in exchange for long fixed leases. That brought in so much cash flow, as do tanker rates that are still well above his lease rates, that he was able to institute a dramatically high dividend and offer many special dividends. My guess is that he will do something similar with Seadrill in a few years, once capital is no longer needed for the newbuild program. Perhaps as a test, he has already sold one Seadrill rig to Ship Finance for about twice what Seadrill paid for it (and leased it back on friendly terms, of course.)
I’ve written quite a bit about Seadrill over at my other blog, though not recently, and I still like it. There were rumors about Seadrill sniffing around for a US driller, including some that I wrote about concerning Pride International, but the company has more recently backed off of that a little bit and focused on smaller acquisitions and more newbuild orders. The shares dipped a bit last year, coming down from their enthusiastic high of early 2006 when Seadrill managed to acquire Smedvig from under the nose of Noble Corp., but they have recovered quite nicely on more acquisitions and the appearance of actual earnings (they’re still well off of their recent highs).
But of course, what you wanted to know was not what I like, but what Gue likes — and I’m pretty sure it’s Seadrill in this case. Do note that although this is a thinly traded stock on the pink sheets, it is among the larger companies on the Oslo exchange (don’t let the pink sheet listing in the US fool you — it’s a hair smaller than Nabors, but the market cap is well over $7 billion) … so you can track it much more easily and get a clearer idea of the share price movement over at the Oslo Bors. The Seadrill website also has good information, including some useful presentations and an interactive stock chart.
The company also just today (after the Oslo close) released their latest quarterly earnings, which at 11 cents don’t sound that exciting for a $19 company, so clearly what’s for sale here is future earnings on those deepwater contracts that start rolling in over the coming 18 months. Do note that it looks to me like earnings were right in line with what analysts predicted for this quarter, so depending on how sentiment is rolling the shares may go on sale tomorrow — certainly please don’t buy on the pink sheets today without considering that the “fair” price in Oslo might come down tomorrow (or it may go up, for all I know … just trying to warn you here). They also did note that they’ll be spinning off their well services unit this year, which might help the shares, and they continued to downplay big acquisitions with the valuations currently looking fairly high compared to years past. (Probably thanks, in part, to Transocean and GlobalSantaFe coming together.)
And again, I own shares in this one, so please assume that I’m either cheerleading or lying, and do your own research if you’re interested in Seadrill. I’m sure they’ve got skeletons that I haven’t shared with you here.
OK, so it turns out that the spirit is willing, but the fingers weak … four drillers is too much to blather about in one writeup … we’ll make this a two-parter and I’ll get back to you on the other two in the near future.