Drillers: The Shift From Value To Speculative
As you probably can tell - I am, at my core, a value investor. But thanks to CAPS (for good or bad) I've realized that speculative investing has its merits - especially when you do your homework.
I've been heavily invested in the drillers as of late (just look at my picks). Its been a total value play for me to this point. Many companies with contracts that PROVE the growth over several years at rock bottom prices - Value Investing Nirvana!
The tide has changed. Drillers have now moved into the world of speculation. Most of the deepwater drillers are up huge and have crushed the S&P 500. Woo hoo! Its the only reason I'm beating the S&P now.
Have the drillers ended their big run simply because they were cheap? Maybe. There are several signs that point to the drillers becoming a speculative play.
1) M&A activity - this is actually good for investors, so it only means buy more drillers. However, it does speak to a new thinking in the sector. Execs are now looking to the future and realizing bigger returns given the "expeced" future contracts. You could look at it differently, like a way to cut costs, but I don't buy it. They would have done it before.
2) Drillers taking on more of the risk - GSF just put up its own money to build the next rig, something that custom made software makers and drillers normally don't do. Wait till somebody contracts for it, then build. ESV is seeing dividends from their spec move into deepwater. ESV just signed a deep water contract for 2010 with a very nice dayrate. That's right, 2010.
3) The price of oil - Soaring to $80 has got every oil executive of every country, corporation and small fry trying to get that black stuff out of the ground. When its this good, why shouldn't we speculate as to what the future might hold. Invest now, or we might miss out... at least that is the philosphy - the philosophy of speculative investing.
HPEGuys take: The market has shifted from a no-brainer value investment opportunity to a speculative one. Does this make it bad? No, it doesn't. In fact, I think its better. There is a ton of reasons to speculate here. Everybody is thinking deepwater drilling is the wave of the future and as an investor, you can ride right along with it. Its never been better to be a driller owner. The only difference now, is that you're speculating.
The risk to owning these stocks has increased, but the possible returns keep me salivating.