The long case for drillers
As I have mentioned in previous posts, I have become very interested in investing in drillers lately after this Gulf disaster absolutely hammered a number of stocks in the sector. I just picked up some bonds with relatively short maturities that are currently yielding around 8.5% in real life this morning.
I am being careful not to mention the names of any specific companies that I am considering taking real money positions in in my blog because I don't want to freeze myself out of them (I have to abide by TMF's blackout rules).
I just came across an excellent long case for another driller a little while ago on the fantastic Rational Walk blog:
Noble Corporation Profile and Analysis
The piece is definitely worth a read. While it specifically talks about Noble (NE), much of the general information in the article and the thought process behind buying a driller right now can be applied to the rest of the sector.
I added NE to my CAPS portfolio ten days ago. Barring any unforeseen draconian drilling restrictions issued by the U.S. government it appears as though I may have gotten lucky and come pretty close to picking the bottom for this company, it's stock is already up nearly 12% since my green thumb. Time will tell.
Here's the summary of the author's, Ravi Nagarajan, case for buying stock in Noble:
Noble Corporation appears to be in a well diversified position from a geographic standpoint and has delivered solid financial results with minimal leverage in recent years. Free cash flow is impressive relative to the current market capitalization of the company which reflects no premium on reported book value as of March 31, 2010. The company should be protected to some extent in the near term by contractual terms associated with the six deepwater Gulf of Mexico rigs. Chairman and CEO David Williams has indicated that all contracts have force majeure clauses but whether these clauses will come into effect is not known at this point.
In the long run, it is likely that the United States government will again allow deepwater drilling, albeit with tougher regulation. In the event that an extended moratorium exceeds the lengths of Noble’s current contracts, the company should be able to eventually redeploy assets in other parts of the world.