Oil Drillers Knocked Down but Positioned for Long-Term Success

While BP is still working rigorously to clog the leak it might not matter as the damage has already hit. The gulf waters are trenched with oil, beachesdevastated, fishing industry wiped out, swamp lands unfixable, and the shares of the oil drillers slashed in half. Since the devastating explosion on April 20 drilling stock have tumbled down. The big names have fallen somewhere between 20%-40%, the list includes:

Petrobras (PBR) ↓25%

Diamond Offshore (DO) ↓31%

Ensco (ESV) ↓34%

Noble (NE) ↓38%

Transocean (RIG) ↓46%

Hercules (HERO) ↓49%

“We Need the Drillers More than they Need Us”

The fact is long-term these stocks are all Blue Chips and great buying opportunities. The overreaction due to what is now called the “Worst Oil Spill in History” has led to the over-selling of drilling stocks. The industry has lost over $100 billion in value yet I believe these losses will only be temporary. It’s hard to see oil exploration shut down completely. The fact is our society needs the oil drillers more than we need them. We have tapped out all the easy oil in the world and now we have to dig deep to find the rest. Currently there has been no viable solution to supplant oil as the worlds driving force and without offshore drilling we will be unable to have enough supply to meet demand. Our population continues to grow and so does the demand for oil. We currently demand 85 million barrels of oil per day, with these numbers expected to rise; offshore drilling will have to continue. The industry might have taking a short-term hit but they will be back up and running sooner than you believe. The two major issues that still needs to be resolved are:

  1. How long the delays/ban on drilling will last?
  2. What will be the potential penalties/lawsuits?

The first problem I believe will be addressed sooner than later by basic supply and demand needs. As for the second problem, we cannot resolve that issue until we find the culprit of the explosion. Who’s to blame? It was Transocean’s rig being operated by Halliburton who was supervised by BP. The fact is all of the following have billion-dollar insurance coverage, which should be enough to pay for the damages. So now that we have outlined that the problems at hand are not as big as we make them out to seem, we need to capitalize on the buying opportunities ahead.

Diamond Offshore (DO): Trading at 8 times this year’s earnings this stock wasn’t hit as hard as the rest but still saw shares decline 20% plus. Look for it to rebound based on upbeat earnings expectations carried by strong sector performance. Trading at around $57, I see this stock rising to $95 in a year.

Petrobras (PBR): PBR is one of my favorite stocks and top drillers. Positioned in Brazil they are one of the world’s largest oil companies. The list goes on about how many upsides this stock has so read my past articles to keep updated. Anyways trading at $35, expect this stock to be back to mid $60s.

Ensco (ESV): This stock has been unfairly hit by shareholders, as it had nothing to do with the spill. Trading at 7 times next year’s earnings I put a price target of $65 on the stock, quite a rise from the $35 price it’s trading at currently.

Noble (NE): Another stock unfairly hit is a very attractive buy due to extensive backlog of contracts, strong balance sheet, and stacks of cash. Trading at $27 I see it going to $53 in a year.

Transocean (RIG): Trading at 6.5 times this year’s earnings this stock will soar rapidly once it takes off. Don’t be worried by potential bans as the company has years and years of backlogged contracts meaning earnings will not slow down. In a year I see this stock trading at $100, quite a steal since it’s a BUY at $51 right now.

Hercules (HERO): This one is a really interesting play; with a market cap of only $360 million I could see HERO as potentially being bought out by one of the billion dollar drillers. With the huge costs associated with the oil spill crisis many small drillers might realize they can’t compete. Having dropped 40% already I see this as a top buy. In a year look for this stock to be trading close to $6 a bargain since I just bought it at $2.80.

Buy Drillers or Miss Out on the Rally

Outlined above are all strong buying opportunities, I would advise buying an array of these stock to diversify across the sector. In the short-term these prices might not swing much due to the outlined problems above however once the government grants drillers access to the Artic, Pacific Ocean, and Eastern Coast, which they will these stocks will soar. The reason these rigs are offshore and in high-risk scenarios are we have depleted our planet of easy to find oil. Now we are suffering the consequences however only temporarily can we shutdown operations. President Obama was relaxing on offshore drilling before the crisis however even a pro-environment government will have to realizes we need to drill for our own oil to reduce reliance on the damn Middle East who has held us hostage for years. This reliance along with long-term supply and demand will lead the resurgence in the following stocks making any investor blinded not to buy in.

Filed Under: Commodities | Emerging Markets | EnergyFeatured


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  3. BP was forging ahead with its efforts to capture or burn off oil as it gushes from the well on the bottom of the sea.