Oil and Gas Investments Basics

Oil and Gas Investments Basics: Oil Services Are Cheap
A Special Report for Dynamic Market Alert
by Steven Lord, Editor, Trend Investor


Like a lot of things in the markets, the recent run to nearly record levels (we were within a few points of a new all-time high as this article went to press) is a somewhat paradoxical thing: Stocks are rising on the hope that the Fed begins to cut rates sooner rather than later, but of course the only reason the Fed would do such a thing is if the economy was slowing faster than anticipated, which is clearly bearish for the stock market. No one ever said this business made much sense.

Meanwhile, oil is down a dollar per barrel today, which is being utilized by the talking heads to "explain" the strength of the broader market. I don't claim to knowing everything about what moves markets, but nearly 20 years in this business tells me a $1 move in the oil price - especially at these levels - is hardly enough to spur massive, across-the-board buying.

Frankly, I am always amazed at how short-term the market's memory can become. (Did you ever imagine we would someday think $60/barrel oil was cheap? Just a year ago weren't we all screaming that oil had reached $60?)

But aside from a welcome drop in the price of gasoline, oil's correction has been good for another thing: It has opened up a major opportunity in the oil service companies. These are the folks who provide the equipment, knowledge and technical expertise to exploration and production companies around the world.

The sector has been just crushed since oil began to correct several weeks ago, far more than the price of oil itself.

How Invest in Oil Stocks: Oil Service Companies and Wall Street

The market is usually pretty wary of oil service companies. Because they are at the mercy of the big oil firms, it is a sector famous for boom-bust cycles. But this time around we think the selling is based on flawed assumptions.

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First, Wall Street is expecting negative earnings surprises from these stocks, which we think is very unlikely. Globally, oil output is barely staying even with demand, think nothing of growing, while field maximization and efficiency have become mantras within the industry - both factors that indicate higher, not lower demand for oilfield services and drilling firms.

Another reason why Wall Street has decimated this sector is fears of slowing economic growth, which by definition slows demand for oil. But we think such fears are also overdone - the Fed has finished hiking rates and will likely cut them sooner than many realize, while bond yields worldwide have worked their way lower over the past several weeks

Oil and Gas Well Investing

Finally, these stocks are universally cheap. Transocean, the largest provider of offshore drill rigs in the world, will go from earning $2.13 per share in 2005 to an estimated $7.80 per share in 2007, a whopping 150% gain in EPS in just over two years. Yet the stock trades for a forward P/E multiple of only nine times that figure. Diamond Offshore, a smaller firm in a similar space, trades for only seven times 2007 estimates. Tidewater, which grew earnings 130% between fiscal 2005 and fiscal 2006, trades for eight times fiscal 2007's expected numbers. And so on.

Occasionally, the market overreacts to a perceived threat and serves up a truly great opportunity. This is one of them. Oil service stocks are on the bargain table - grab them while you still can.

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Copyright 2006, The Taipan Group, LLC and Dynamic Market Alert, 808 St. Paul St., Baltimore, MD 21201
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Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.