Today’s recommendation is an offshore-drilling contractor that will report earnings after the market closes today. The Energy Letter Editor Keith Kohl, who wrote the recommendation below, thinks those earnings could be a catalyst for the stock to challenge its multi-year highs.
“When we began searching for a new buy, the offshore sector immediately jumped to the front of the line. It’s no secret that offshore drillers have been demonized since the catastrophe at BP’s Macondo well [in April 2010]. The subsequent one-year ban on drilling in the Gulf of Mexico struck the entire sector. And it didn’t even matter how safe a record a company had; if it was drilling in the waters of the GoM, the stock was punished. Fortunately, we were able to recognize the opportunity for what it was, which gave us a solid 16% gain on Atwood Oceanics, Inc. (ATW, $47). [Now, we’re looking at ATW again, because we think] the offshore oil and gas industry is going to get a near-term boost. ...
“An October report titled, ‘Use It or Lose It’ showed that over 20 million acres in the Gulf of Mexico are being held idle, comprised of more than 3,684 leases. This means the leaseholder is neither exploring for, developing, nor producing oil and gas from the lease. Five of the largest publicly-traded oil and gas companies -- including BP, Chevron, Shell, ExxonMobil and ConocoPhillips -- are sitting quiet on at least eight million acres. According to the report, half of the leases in deepwater areas have been idle for over five years. But it isn’t Big Oil that we’re interested in buying today.
Buy Atwood Oceanics (ATW)
“Back in August, we put the company back on our radar. And we feel it’s simply too good to pass up right now. The company boasts an offshore fleet of two ultra-deepwater rigs, three deepwater semi-submersibles, and four high specification Jack-ups -- and that doesn’t include the five rigs that are under construction.
“Remember, some of these deepwater rigs can command daily rates over $500,000. The Atwood Condor, for example, is currently under contract by Hess and earning $514,000 per day. The stock comes with a certain degree of value attached, too. With its share price currently hovering around $49, Atwood is trading with an attractive forward price-to- earnings ratio of 9.68, as well as a trailing P/E of 12.8 and PEG ratio of just 0.64. In fact, Atwood is quickly approaching its pre-Macondo high of $60. Look, we don’t want to keep chasing this stock, which is exactly what would happen by waiting for a pullback. The company has able to beat the earnings consensus five times in the last six quarters, so don’t be surprised if it manages to do it again on the 15th. We’re buying shares of Atwood Oceanics up to $55 with a sell target of $75.”
- Keith Kohl and Brian Hicks, The Energy Investor, November 2012