Friday, July 16, 2010

Oil n' Gas Guys

News from the Gulf of Mexico sounded promising for the first time since crude oil began spewing from BP’s (BP: NYSE) Macondo deep water well. A makeshift cap on the well fabricated by Cameron International Corp. (CAM: NYSE) has so far withstood pressures in the oil deposit, staunching the flow of oil from the well for the first time since the April explosion on BP’s off-shore rig.

In the last post, I mentioned several private and public companies that provide equipment, supplies and services for the off-shore oil and gas industry. The idea was to find which ones, if any, offered safety or disaster clean-up or environmental damage mitigation products and services. Alas, safety is not a word that surfaced in any one of the larger operations’ self-descriptions. Suppliers of environmental damage and clean-up products remain small, private concerns.

Shares of big-cap Cameron are trading at 12.5 times forward earnings, even after rising off the drop in the oil and gas industry precipitated by news of the Macondo disaster. Analysts trimmed estimates for Cameron in the last month, likely as a consequence of what is perceived as a shrinking industry if off-shore drilling put on indefinite hold.

Contrarian investors might see this as a time to swoop in for bargains. The contrarian thesis is that first, the U.S. cannot afford to abandon deep-water off-shore oil, and second, the oil and gas industry is sufficiently robust to accommodate a higher expenditure on disaster or accident prevention measures. Some of the oil and gas producers already have decent track records. If the first two premises are accepted, then now is the time to look for oversold stocks.

Shares of Helix Energy Solutions Group, Inc. (HLX: NSYE), a provider of reservoir development services, look far more interesting anyway. The stock is trading at a pricey multiple of 67.3 times trailing earnings. Smart investors will look more closely at the trailing cash flow multiple of 4.0 times and the forward earnings multiple of 6.7 times. The company is a consistent generator of cash even if quarterly results look “gnarly” (a sophisticated financial term describing mixed quarterly profits and losses).

Tetra Technologies, Inc. (TTI: NYSE) offers well plugging and abandonment services to off-shore drillers. This is another small-cap that is a consistent generator of cash flow even if reported quarter earnings appear choppy. At 9.0 times forward earnings, the stock looks interesting for contrarian or value investors with some tolerance for the uncertainties in the off-shore oil and gas sector. The consensus estimates suggest Tetra will post both revenue and earnings gains in the year 2010. Strong year-over-year comparisons could renew interest in the stock as the initial pain of the Gulf disaster subsides.

Forward valuation of Cal Dive International, Inc. (DVR: NYSE), a provider of pipe-laying, platform installation and salvage services, also looks compelling at 8.7 times forward earnings. Operations are a reliable generator of cash and the company even managed positive cash flow in the March 2010 quarter despite a reported net loss. The consensus estimate for DVR suggests another loss in the June quarter, which could continue to weigh on the stock. Nonetheless, the mean price target is $9.90, implying 50%-plus price appreciation from the current price level.

Global Industries Ltd. (GLBL: Nasdaq) (platform installation and removal, pipelaying), Oceaneering International, Inc. (OII: NYSE) (engineering services), and Dril-Quip, Inc. (DRQ: NYSE) (wellheads and subsea control systems) were also mentioned in last post. However, in my view valuations are not as enticing for these stocks compared to DVR, TTI and HLX.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


No comments: