At StreetAuthority, we've been paying a lot of attention to the
energy renaissance currently happening in the United States
It's an exciting time to be an investor in the energy sector.
The country's oil and natural gas reserves are so big, the United
States could soon become the world's largest oil producer. The
Associated Press has released a report saying the United States
could in fact pass Saudi Arabia in terms of energy production
as soon as 2020.
Needless to say, investors who make smart investments now could
see windfall profits during the next decade.
This is why LNG) are up more than 40%
on the recommendation.
However, some investors are still skittish about investing in
this highly competitive industry. With good reason, they worry
about energy companies' ability to maintain profits when commodity
But the company I'm going to tell you about today is not an oil
and exploration company, a pipeline company or a refiner. This
company is a "pick-and-shovel" play that provides the drilling
equipment used on land-based and off-shore rigs.
This company is so dominant in its field that it has garnered a
"wide economic moat," which is rare in the energy sector. Put
simply, the barriers to entry and lack of meaningful competition
give this company a huge competitive advantage over its peers.
Here's the story…
This company's equipment is on 90% of the world's oil rigs. In
fact, according to Morningstar, "a rig cannot be built in the
Western world without using some components from [this
And the demand for new oil rigs, especially deep-water rigs, is
In the past, this company would deliver about three or four new
deep-water rigs per year, each costing roughly $500 million.
Today, demand is up to 20 new rigs a year and shows no signs of
"Demand for ultra-deepwater rigs is at unprecedented levels as
sustained high oil prices, coupled with operators' desire to
achieve production targets, is driving demand higher in essentially
every region," a recent Barclay's Equity research report said.
In 2012, rig technology orders for this company were $9.4
billion compared with $3.9 billion in 2010.
In fact, new orders increased to such a degree that the
company's backlog just hit a record high at $11.86 billion.
The company posted $1.6 billion in free cash flow last year, up
from $1.3 billion the year before. Earnings for the fourth quarter
of 2012 were also strong, up 16% from the previous quarter, topping
Best of all, I believe shares of National Oilwell Varco
Inc. ( NOV
) are currently undervalued at today's prices.
Shares are selling at a forward price-to-earnings (P/E) ratio of
9. This is a steep discount to its peers, which currently trade at
a forward P/E of more than 18.
The company has also increased its dividend payout steadily
since it started paying quarterly in 2009.
Risks to Consider: Some analysts are concerned that
competitor Cameron International Corp.'s ( CAM ) recent
success could be a threat to National Oilwell's economic
Any future disasters like the Deepwater Horizon oilrig
explosion in 2010 could have a devastating effect on the
Action to Take --> Shares of National
Oilwell started the year strong with a run-up to $74 before pulling
back to today's price around $68. I believe this is a good entry
point for investors. Buy the stock under $69.
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