What are we looking for?
Oil drillers. According to the International Energy Agency, the United States is on track to become the world’s largest oil producer by 2018. In North Dakota alone, production has doubled in two short years. Hydraulic fracturing and horizontal drilling will push the U.S. into oil self-sufficiency by 2030. My colleague Allan Meyer and I looked at a key sector that will benefit from this surging production.
We wanted companies that primarily drill in the United States although most of these companies also have international operations. We have sorted them by the number of drill rigs that the companies own.
We are big believers in the price-to-cash-flow ratio (P/CF). This valuation metric is calculated by dividing the share price by the trailing 12 months cash flow a share. It gives an easy value comparison to other companies regardless of size. Essentially, the P/CF represents the amount an investor is willing to pay for a dollar generated from a company’s operations. A low number is preferred.
We have also shown the price-to-earnings ratio (P/E). This metric lets us compare relative earning power, regardless of size. Like P/CF, we are looking for a low number.
What did we find?
Bermuda-based Nabors Industries Ltd. has the largest drilling rig fleet in the world and operates in more than 25 countries. It has the lowest P/E, and one of the lowest P/CF ratios. It is definitely the best value on our screen.
Unit Corp., of Tulsa, Okla., has the lowest P/CF and has increased its rig count by 69 per cent since 2003.
Calgary-based Ensign Energy Services Inc. is the second-largest drill operator in North America. The P/CF is acceptable but the P/E is a touch high. It is the dominant driller in the U.S. Rocky Mountains area as well as in California, with a growing presence in the southern United States.
Hercules Offshore Inc. of Houston has the highest one-year rate of return, and is one of the most overvalued companies on the screen.
The largest company by market capitalization is offshore driller Transocean Ltd. of Geneva. Its rigs can operate in water depths of more than four kilometres, and is capable of constructing wells that are 13 km deep. The company owned the Deepwater Horizons rig that exploded and sank in the Gulf in 2010, leading to the worst environmental disaster in U.S. history.
Any rumours of the death of OPEC are premature, but gushing U.S. oil production is definitely a game-changer. Investors should do their own research and further examine this growth area.
Oil drilling companies with a strong U.S. presence
|Name||Symbol||Market cap ($ bil.)||Recent price $|
|Ensign Energy Services||ESI-T||2.51||16.35|
|Helmerich & Payne||HP-N||6.79||64.09|
All prices in local currency. Source: Bloomberg
|Name||Symbol||Market cap ($ bil.)||Recent price $||P/CF||Rig count||P/E||1 yr % return|
|Ensign Energy Services||ESI-T||2.51||16.35||4.98||444||14.2||20.3|
|Helmerich & Payne||HP-N||6.79||64.09||6.32||320||11.5||33.3|
|Rowan Cos. Inc.||RDC-N||4.25||34.35||9.57||35||16.6||6.9|
|Oil States Int'l||OIS-N||5.48||100.25||6.32||33||12.5||50.5|