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
Today, we can use the same idea to our advantage byinvesting
in the "picks and shovels" companies behind the U.S. energy
As StreetAuthority expert Dave Forest wrote in his most
Scarcity & Real
"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
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 (
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 (
) 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
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
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
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 .
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