The Best 'Pick And Shovel' Stock For The Energy Boom


Shutterstock photo

During the 1849 California gold rush, the yellow metal sold for between $12 and $35 an ounce. That was enough in those days to make you rich -- if you could find it.

But consider this: Because the Western frontier was undeveloped at the time, the price of basic goods for these intrepid miners was through the roof.

Eggs cost $3 each. A bottle of whiskey cost $16. According to "The Gold Rush Chronicles," a history of the period: "Pills were $10 each without advice, $100 with."

You may already be familiar with the story of Levi Strauss, the German immigrant who made his fortune during the gold rush -- not by striking gold, but by supplying the rough-and-tumble miners with sturdy denim overalls.

The origin of theterm "picks and shovels" may have had its roots back in the 1850s when smart businessmen like Strauss realized they could make just as muchmoney with alot less risk supplying the miners with picks, shovels and other essentials.

Today, we can use the same idea to our advantage byinvesting in the "picks and shovels" companies behind the U.S. energy boom.

As StreetAuthority expert Dave Forest wrote in his most recentissue of Scarcity & Real Wealth :

"It's getting harder these days to find good value in the energy sector. Indices have moved up, and company valuations have become richer. On a qualitative level, investor sentiment is running high in many energy subsectors. North American exploration and production companies (E&Ps), for example, are soaring relative to their peers elsewhere in the world. I think this is becauseunconventional oil and gas in the United States has been one of the few economic "good news stories" among developed nations since 2008."

The "pick and shovel" play we'll be looking at today is still a great value.

Shares are cheap at a forward price-to-earnings (P/E ) ratio of 10 and a price-to-book ratio of 2, both of which are below industry averages.

And just like the picks and shovels providers in the days of old, this company's products and services are essential to the drilling rigs of big energy companies around the world.

Oil States International ( OIS ) is in the enviable position of being one of the leading suppliers of specialty oil and gas equipment andsupport . The company is an industry leader in the specialized engineering of offshore platforms, subsea pipelines and floating drilling rigs.

These offshore drilling environments are some of the most challenging workplaces in the world. In addition to the nuts and bolts required to run a deepwater drill, OIS also provides value-added services to offshore workers like food services,facility management and waste removal.

The company has a significant onshore presence as well, providing mobile drilling rigs and rental tools to companies working in every major shale play in the U.S. With offices across the world, OIS is well diversified. The company's products are mostly manufactured in the U.S. and U.K. and then shipped to energy production sites around the world.

On July 30, OIS announced that it would spin off its accommodations business (workforce housing and services) into a separate company thatwill be structured as a REIT. The proposed spinoff will be executed through a tax-free distribution to Oil States' shareholders during or before the 2014 summer.

Management believes the split will create additional shareholder value by allowing the spinoff company togain the tax advantages of areal estate investment trust (REIT) .

Both management andanalysts expect OIS to remain highly profitable. Just how profitable? Since 2010,earnings per share ( EPS ) has nearly tripled from $3.19 to $8.10, whilerevenue has doubled to $4.4 billion.

As you might expect, asEPS and revenue have risen, so have share prices:

But because of its size and specialtymarket niche, I think this company has a lot of room left for growth. The company currently has amarket cap of $5 billion, which compares with $41 billion for a more general services provider like Halliburton ( HAL ) .

The spin-off of the accommodations business into a REIT makes sense for tax reasons. And a leaner, meaner core business will allow OIS to focus on what it does best.

Risks to Consider: A downturn in energy prices and a subsequent lack of new exploration could hurt profits. The company is subject to lawsuits in the event of any disasters like the one suffered by Transocean ( RIG ) on its Deepwater Horizon rig in 2010. OIS does not currently pay adividend , but investors can expect the future REIT spinoff to pay a hefty dividend once the deal is finalized.

Action to Take --> Oil States International is a strong buy after a recent dip in share price fromrecord highs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing , Commodities
More Headlines for: EPS , HAL , OIS , RIG

More from StreetAuthority




Investing Ideas
Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by