One of the real charms of energy sector is the potential for
fast gains. Unlike staid utility stocks, energy stocks are so
volatile that a six or 12-month price target can be secured in a
matter of months.
Better than Exxon
" pick of
Sandridge Energy (NYSE:
in January rose 40% in just six weeks. That kind of quick move came
despite a lack of important catalyzing news events, so I later
suggested closing out that play and putting it in to two other
Since March 1,shares of
Newpark Resources (NYSE:
Parker Drilling (NYSE:
my two subsequent picks
, are up 37% and 38%, respectively. Though each stock may have a
bit more upside to the targets I noted back on March 1, the moves
have come so fast, that I think profit-taking is now the wise move.
I've been in this business long enough to know that luck can aid
even the wisest investors. Those three stock plays were clearly
undervalued, in my view, but I can't deny the reality that my
timing was quite lucky as well. So I'm always cognizant that these
kinds of plays -- especially in such a volatile sector -- can move
down as fast as they move up. That sentiment keeps me humble enough
to never become too bold when picking stocks. I still prefer them
cheap and unloved, which limits downside.
Now it's time to move on to a pair of new unloved energy plays that
could have clear upside in the next 6-12 months.
1. Hercules Offshore (Nasdaq:
A heavily-indebted company in a struggling industry can look toxic.
If conditions fail to improve, then the company may become a
candidate for bankruptcy. Yet if conditions do improve, then
investors can quickly shift from fears of a weakbalance sheet to
promises of a surgingincome statement . That's the case for
Hercules Offshore, which has nearly doubled since
I profiled it
in January, but could have additional upside of at least 50%.
Hercules owns drilling platforms and other equipment, along with a
marine towing business. and the company is largely focused in the
U.S. Gulf of Mexico. Business has been lousy in recent quarters,
largely as a result of the drilling ban. Hercules leases its gear,
and when business slows, lease rates plunge. Revenue fell more than
10% in 2010 to $657 million, and the
rose more than 50% to $134 million. That's a scary proposition for
a company with $700 million in
To keep lenders at bay and its stock from falling to zero, Hercules
needed to prove that it could generate improving EBITDA (
before interest, taxes,
), which thanks to rising demand, finally appears to be happening.
Fourth-quarter 2010 and first-quarter 2011 results came in ahead of
plan, and analysts expect EBITDA to jump 20% this year to around
Why the increase? Because Hercules is finding more customers for
its equipment and services. The market still has a good deal of
slack as drilling activity in the Gulf of Mexico recovers, so
pricing is still not where it had been a few years ago. At the end
of the fourth quarter, the company earned roughly $40,000 per day
for its drilling rigs. That figure rose to $42,000 at the end of
the first quarter and now stands at $44,000 in the middle of the
second quarter. As long as lease rates don't pull back, EBITDA
should be able to move well north of $250 million by 2012,
according to analysts at Global Hunter Securities.
As another key
, Hercules now controls 20 drilling rigs bought out of bankruptcy
from Seahawk Drilling, as I noted in late January. A number of
those rigs sit idle but are likely to be put back into service
later this year and into 2012. That should provide a further lift
Hercules was a "messy story" that is now getting much cleaner. As
it continues to generate improving lease rates and higher
utilization (the percentage of rigs that are being leased),
investors are likely to keep warming to this stock. With the
prospects of $300 million in EBITDA by 2013 coming into focus, I
think the EBITA multiple can expand up to seven times that target,
into the $9 to $10 range.
2. Weatherford International (NYSE:
This might seem to be a bad time to be recommending shares of this
energy services firm. Rivals such as
are pounding out great quarters while Weatherford continues to miss
the mark. The company has missed
forecasts for two straight quarters, and analysts have been
steadily lowering their outlooks for 2011 and 2012.
All of the blame resides beyond our waters. Rising tensions in the
Middle East, contract troubles in Russia and flooding in Australia
all conspired to push international sales and margins down sharply
in the first quarter. That obscured very impressive results in
North America. The good news: those international factors should
turn around in a few quarters, as management noted (though the
Middle East is something of a wildcard). When that happens,
investors will again take note that this is a very cheap stock
relative to peers.
Analysts at Citigroup think results will turn up within a few
quarters, and over time, Weatherford will be acash flow machine.
They forecast EBITDA to rise from $1.8 billion in 2010 to $4
billion by 2013, thanks to a wide range of operational
improvements. Shares trade for just five times their 2013 EBITDA
forecast, on an
basis. If Weatherford can't boost results quickly, another catalyst
may emerge: "Absent a meaningful profit rebound WFT could be
acquired at a substantial premium," according to Citigroup, which
has a $27 price target.
Action to Take -->
Both of these firms have struggled in recent periods, which is why
they remain as bargains while the rest of the sector has surged.
But a clear path to better results is in focus, and as that plays
out over the next few quarters, shares should finally reflect a
fuller valuation and generate gains for shareholders.
-- David Sterman
P.S. -- Few investors realize that a 20-year energy agreement
between the United States and Russia is about to expire. This deal
supplies 10% of America's electricity. As broke as our government
is, the situation is so serious that President Obama is asking for
$36 billion to avert this crisis. And Republicans support him.
Here's what's going on…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.