Energy stocks continue to trade as if no one will ever need oil and gas again. While the slow economy has caused many companies to cut back on drilling and exploration programs, these poor conditions will not last.
According to the U.S. Energy Information Agency, global demand for energy will rise 50% between now and 2040, and fossil fuel companies will supply the bulk of that. Yesterday, the Energy Information Agency’s most recent report stated,
“In 2040, liquid fuels, natural gas, and coal still supply more than three-fourths of total world energy consumption. Petroleum and other liquid fuels remain the largest source of energy.”
As the popular theme is that renewable energy will supplant oil and gas, EIA estimates that renewable energy shares will increase from 21% to 25% between now and 2040. Oil companies will have to go find some more of the black gold before too much longer, and the currently cheap stocks in the field could see substantial appreciation.
Noble Corporation (NE)
Noble Corporation (NE) is an offshore contract driller that has seven offshore drilling units operating around the world. In a recent analyst presentation, Noble management pointed out that global oil production is not keeping up with consumption, and major oil companies are struggling to replace reserves.
Eventually, drilling activity — particularly offshore activity — is going to have to pick up, and Noble will be a major beneficiary. In the meantime, NE stock is trading at just 77% of tangible book value and yields 5.6%.
Fir Tree Partners owns 9.6% of Noble and is pushing management to consider moves that would build shareholder value including placing some assets into a master limited partnership. Insiders are pretty confident about the future as several executives, including the CEO and CFO, have been buying NE shares lately.
Dawson Geophysical (DWSN)
Dawson Geophysical (DWSN) provides the geological information oil companies need to search for oil and gas. Dawson provides onshore seismic data acquisition and processing services in the U.S. and Canada, and business has been slow as many companies delay exploration activity.
However, Dawson has been around for more than 60 years and has seen these types of delays before. So, Dawson is prepared to survive until conditions improve and activity increases.
DWSN stock is trading at just 86% of book value right now, and it is clearly a potential bargain.
Pacific Drilling (PACD)
Pacific Drilling (PACD) is an offshore contract driller specializing in the deep-water drilling sector. Pacific Drilling has six operational drill ships and two more under construction right now. Pacific Drilling is growing in a weak market.
In the most recent quarter, Pacific Drilling’s EBITDA was up by 61% year over year, and cash flows rose by more than 100%. CEO Chris Beckett commented,
“Despite the challenging market conditions, this quarter was the best in our company’s history. We continue to deliver exceptional financial results driven by our outstanding operational performance and ongoing fleet growth.”
At its current price, PACD stock trades at just 86% of book value and appears to have significant upside.
Disclosure: As of this writing, Tim Melvin was long NE.
