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A Frenzy Is Building in These Energy Stocks

By Matt Badiali, editor, S&A Resource Report
Wednesday, June 16, 2010

I was standing on a dusty road in rural southern Texas... About a mile away, the blue topmast and white derrick of a drilling rig stuck up above the trees. From where I stood, I could see at least 16 wells either drilling or just completed.
"Drilling companies ought to do real well this year," my friend said. "There are 55 drill rigs in the play right now, with 150 predicted by year's end." My friend is a 30-year veteran of Texas oil and gas exploration. And about this time last week, we were standing in the middle of nowhere outside the tiny town of Kenedy.
Kenedy is right in the heart of Texas' hot new oil field – the Eagleford Shale.
Demand for drilling equipment in the Eagleford is running high right now. ConocoPhillips, Petrohawk, and Enduring Resources all had rigs active with a few miles of where we stood.
Rig rates are soaring, equipment is hard to find, and almost nobody outside of the industry knows it... That's why land drillers look like fantastic speculations right now. I think we could make two or three times our money over the next 18 months. Let me show you why...
In the Eagleford, the number of rigs operating doubled this year. The rig count is up 68% in the Marcellus Shale in Pennsylvania. And it's up 65% in the Piceance Basin in Colorado. Today, there are 74% more rigs operating in the U.S. than there were a year ago.
Rig rates are climbing as operators lock in long-term contracts. Pioneer Natural Resources locked up several rigs on two-year contracts at $25,000 per day. That's up from $12,000 per day in 2009 and $6,000 more than operators paid a few weeks ago.
So revenues at the land drillers are climbing fast. But the stock market hasn't caught on. A lot of these drillers are selling at or even under book value.
For these kinds of companies, book value is essentially the price you could get if you sold the drill rigs. It's like the Blue Book value of your car. When my car is running fine, I'm not going to sell it for the Blue Book price.
The same thing goes for drill rigs. If you can get $25,000 per day renting your rig, you'd never sell it for peanuts... But that's exactly what the market is doing. Take a look...
Market Value
10-Yr Avg P/B
Current P/B
Key Energy Svcs (KEG)
$1.3 B
Helmerich & Payne (HP)
$6.0 B
Unit Corp (UNT)
$2.2 B
Nabors (NBR)
$6.0 B
Patterson-UTI (PTEN)
$2.3 B
Union Drilling (UDRL)
$130 M
Pioneer Drilling (PDC)
$335 M
Precision Drilling (PDS)
$2.0 B
As you can see, most of the land drillers are trading far below their 10-year average price-to-book. The last time we saw a similar crash in drillers was in 1999. Nabors traded at book value. Patterson dropped to 0.6 times book value. Then, over the next 21 months, they both bounced dramatically. By December 2000, Patterson's shares traded at 4.7 time book value. Nabors' shares soared to 4.8 times book value.
I expect a similar recovery in the next two years. You can make an enormous amount of money on these companies if you buy now, when the market hates them.
And with the rig rates heating up, the upside is tremendous. That's why I went to south Texas to investigate reports of equipment shortages and soaring rig rates. The last time I saw this kind of frenzy was in 2006 and 2007 – and drillers made investors rich.
Helmerich & Payne rose 200% from June 2005 to June 2008. Unit Corp doubled over that same period. And that was starting from far higher valuations than we're seeing today.
If you don't own shares of drilling companies yet, you should get in soon. Buying near or even under book value is the best way to limit your risk and make the most money as the market catches on.
Good investing,
Matt Badiali

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Market Watch
Symbol Price
S&P 500 1114.61 -0.1% +22.2%
Oil 35.49 +0.7% -7.8%
Gold 120.33 -0.6% +30.9%
Silver 18.08 -0.6% +29.2%
US-Dollar 86.17 +0.1% +6.7%
Euro 1.23 -0.2% -11.1%
Volatility 25.92 +0.3% -20.7%
Gold Stocks 470.05 +1.0% +39.0%
10-Year Yield 3.28 -0.9% -10.6%

World ETFs
Symbol Price
USA 111.96 0.0% +22.2%
Canada 27.43 +0.2% +25.2%
Russia 17.83 -0.4% -1.1%
India 30.50 -0.3% +2.5%
Israel 14.11 +0.3% +28.9%
Japan 9.69 +0.4% +4.2%
Singapore 11.58 +0.5% +30.6%
Taiwan 11.77 +0.3% +22.4%
S. Korea 47.19 +0.2% +35.4%
S. Africa 57.27 +0.1% +24.0%
China 41.10 +0.2% +10.4%
Lat.America 45.47 +0.4% +31.1%

Sector ETFs
Symbol Price
Oil Service 102.18 -0.1% -3.1%
Big Pharma 61.48 +0.2% +9.2%
Internet 55.53 -0.1% +30.7%
Semis 13.58 +0.0% +24.8%
Utilities 30.15 +0.6% +10.0%
Defense 17.55 +0.0% +22.5%
Nanotech 9.07 -0.9% +3.0%
Alt. Energy 9.05 -0.3% -13.1%
Water 16.52 -0.3% +15.0%
Insurance 14.87 +0.8% +27.6%
Biotech 18.30 -0.4% +40.1%
Retail 17.45 -0.5% +28.8%
Software 21.82 -0.3% +35.3%
Big Tech 46.90 +0.4% +31.9%
Construction 12.46 +0.2% +16.2%
Media 12.74 -0.2% +48.8%
Consumer Svcs 60.00 -0.7% +37.4%
Financials 53.37 +0.0% +25.8%
Health Care 61.51 +0.2% +20.3%
Industrials 56.04 -0.2% +31.7%
Basic Mat 59.14 -0.1% +33.2%
Real Estate 51.90 -0.7% +58.9%
Transportation 80.13 -1.1% +40.2%
Telecom 20.07 +0.1% +11.6%