Supplies of oil in developed nations are at their highest levels since last September and have been rising for six months in a row now. As a result, many oil companies have cut back their capital spending programs and are not exploring or drilling right now.
At the same time, oil demand has fallen to the lowest level since 2012, according to the International Energy Agency. So, many drilling companies have suffered, and their stock prices are extremely low.
However, drilling activity will inevitably pick up again, and these undervalued stocks will rise sharply in value and price.
Here are three oil stocks to buy in anticipation of better times.
Oil Stocks to Buy – Rowan (RDC)
Rowan (RDC) is the first in these oil stocks to buy before industry conditions improve.
RDC is a contract oil driller that has 30 jack-up offshore rigs, one completed ultra-deepwater drillship and three additional ultra-deepwater drillships under construction. All four of the newer rigs are now under contract at favorable day rates and should add to revenues and profits over the next several years. Rowan’s second-quarter earnings were well below last year’s as a result of increased down time for many of their jack-up drilling platforms.
Still, Rowan is well-positioned going forward, especially with the new deepwater oil rigs, and the stock is currently cheap. Rowan shares trade at just 73% of book value right now and have the potential for substantial appreciation with increased drilling.
Oil Stocks to Buy – Hercules Offshore (HERO)
Hercules Offshore (HERO) has been hit with a combination of decreased domestic shallow-water drilling activity in the Gulf of Mexico and the cancellation of a contract in Angola.
HERO stock has fallen sharply, declining more than 30% in the past three months. At this price, HERO stock is trading below 70% of book value and less than five times cash flow. The enterprise-to-EBITDA value is below five as well.
The reasonable possibility that the cancelled rig will be redeployed and domestic drilling again, combined with Hercules’ attractive valuation, makes HERO stock one of the best oil stocks to buy right now.
Oil Stocks to Buy – Transocean (RIG)
Transocean (RIG) is the largest offshore oil driller in the world and has suffered from the same headwinds as the rest of the oil industry. Transocean has been placing older rigs into MLPs and other entities to get them out of the day-to-day operations but still provide cash flow. Then, RIG can focus on the high-specification markets like ultra-deepwater and harsh-weather rigs that command higher lease rates.
Investor Carl Icahn owns more than 5% of the company and has a representative on the Transocean board of directors. As a result of the new dividend policy that Icahn strongly supported, RIG stock now yields 7.67%.
With the stock trading below 80% of book value, Transocean is one of our oil stocks to buy because of the potential for substantial long-term appreciation.
As of this writing, Tim Melvin was long RIG and HERO.