Now’s The Time To Buy These 3 Stocks
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Investors who started buying back into energy stocks last year may be starting to lose their patience. The oil price recovery that was supposed to start happening as underinvestment sinks its teeth into production has yet to materialize. That, coupled with growing shale production, has delayed that recovery to a time that some investors are not willing to wait for.
For investors who still have an eye on the horizon, though, this lull in energy stocks is another great buying opportunity, particularly for shares of Transocean (NYSE:RIG), National Oilwell Varco (NYSE:NOV), and Helmerich & Payne (NYSE:HP). Here’s why that long-awaited recovery is still in the works and why these stocks are great ones to ride that coming wave.
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Why dip back into the well for energy stocks?
The recent pullback in energy stocks seems a bit odd if you are looking at the long-term prospects of the industry. Much of Wall Street piled back into energy stocks after oil prices hit their nadir in February 2016. From there, oil prices rose from $25 a barrel to just above $55 just a few months ago. It would seem that many thought this meant the industry was getting back on its feet and things would return to normal.
U.S. shale drilling had other plans.
The rapid drop in the breakeven cost for shale — and the short amount of time it takes to bring a new well on line — has led to a rapid increase in production from the U.S. that has more than made up for the production cuts from OPEC and the natural decline of existing wells around the world.
As a result, oil prices started to drop again, and many investors lost hope — or patience — that a recovery was well on its way and has begun to sell off oil and gas stocks. So much so that some companies in this industry are trading at prices that aren’t that far above those early 2016 lows.
The next several months are likely going to play out like this. The rapid response time of shale production will likely lead to quick production bumps whenever oil gets above a certain price, only to see prices drop. Looking longer term, though, this likely won’t last for long. U.S. global oil and gas production still represents less than 10% of the entire market, and the lack of investment around the rest of the world will likely result in further production declines from outside North America. Eventually, shale growth won’t be able to offset these decreases and lack of investment and prices will rise significantly.
When that happens, all of those other sources of oil will need to be exploited — offshore, oil sands, etc. — and companies that are still sitting out the doldrums today will look like absolute gems.
Of course, all of them won’t be great investments. Some will just be lucky enough to rise with the overall wave of the industry, but here is why Transocean, National Oilwell Varco, and Helmerich & Payne are likely to do better than most.
Great fleet, healthy balance sheet
It wasn’t that long ago that Transocean’s fleet would have looked more at home next to the Titanic than drilling for oil. It had one of the oldest fleets on the water with several rigs not capable of drilling in the deep waters or harsh environments where oil producers like to go hunting for those massive payoff reservoirs these days.
After a management change where the company brought in Jeremy Thigpen — former CFO of National Oilwell Varco — the company embarked on a massive fleet turnover plan that has left it with a much more capable fleet while reducing its overall debt load. Now, it has one of the strongest financial positions in the offshore rig industry and is on the prowl to make an acquisition or two.
We may be several months away from an earnest recovery in the offshore rig market, but we will likely see another one in a couple of years. With shares of Transocean trading at an astonishing price to tangible book value of 0.20, getting in now looks incredibly lucrative.
Supplying the surge
If the offshore rig market does pick back up again, then all of those idle rigs out there will need to be reactivated. This, of course, means that National Oilwell Varco will play a significant role in the recovery. As it stands today, approximately 80% of all drilling related equipment on rigs comes from National Oilwell Varco. With aftermarket parts comprising of one of its most profitable business segments, a pickup in this business will go a long way toward improving the income statement for the dominant oil and gas equipment manufacturer.
The other added benefit for National Oilwell Varco is that other key markets will serve as a growth lever down the road: land drilling and floating production, storage, and offloading (FPSO) vessels. Land drilling has historically been a smaller part of the business, but the surge in shale drilling has led to onshore parts and equipment now comprising 57% of overall revenue. Further down the road, as major producers start to green-light major offshore projects, they will need FPSOs. These two markets should help to offset the declines in new rig demand that will likely remain tepid for even longer.
While National Oilwell Varco’s stock isn’t as cheap as Transocean’s — few are, really — it still trades at a price to tangible book value that is well below its historical average. As demand for replacement equipment picks up both on and offshore, National Oilwell Varco will benefit immensely.
Not recognizing what is right in front of our faces
Clearly, the timeline for an investment in Transocean and National Oilwell Varco is a bit longer than most. What is surprising, though, is that onshore oil and gas companies are still trading at low prices despite the fact that they are in a much better place than they were a year ago. That is particularly the case in the U.S., where land rig owner Helmerich & Payne is building a dominant market share in the high-specification land rigs that are necessary to handle the complex work that the top producers command today. In fact, there was a point in the first half of this year where Helmerich & Payne was putting an idle rig back into the field every 52 hours.
In fact, there was a point in the first half of this year when Helmerich & Payne was putting an idle rig back into the field every 52 hours. That rapid growth is how the company has gone from 87 rigs in the field this time last year to 191 as of its most recent investor presentation in June.
Here’s the odd thing about this good news: Wall Street has been selling off this stock recently because it foresees a deceleration of U.S. land market growth. That may be the case, but today the company has more than half of its rigs in the field compared to a paltry 25% at the bottom of the rig market. Now that those rigs are working and Helmerich & Payne isn’t shelling out cash to get them ready, the company’s income statement will likely look much better over the next couple of quarters.
Despite what are likely to be better results soon, the company’s stock is still trading near the bottom of its 10-year valuation, with a price to tangible book value of 1.35. For a company like Helmerich & Payne, that seems like a steal.
Tyler Crowe owns shares of National Oilwell Varco. The Motley Fool owns shares of and recommends National Oilwell Varco. The Motley Fool has a disclosure policy.
