Cal Dive - A Surprisingly Undervalued O&G Service Company
As I have mentioned before, I am quite bullish on cylicical oil and gas service companies. More specifically those with deep water Gulf of Mexico exposure. Last September, Cheveron, Devon Energy and Statoil SA reported finding potentially the largest American oil deposit in a generation. According to a New York Times article, the find could hold anywhere from 3 to 15 billion barrels of oil. The only catch is that Jack No. 2 is located some 175 miles offshore, 30,000 feet below the gulf's surface, among formations of rock and salt hundreds of feet thick. With current United States's reserves at 29 billion barrels this discovery could potentially increase our proven reserves nearly 50 percent. Although this sounds spectacular in writing, the situation is slightly more complicated.
This discovered came after nearly 2 years of drilling with the combined investments of 3 major oil companies. While this type of frontier oil drilling is possible with oil at $60 per/barrel, more exploratory drilling at record depths and pressures will be required to bring this oil the market. Even more daunting is that current US demand of 20.5 million bpd will drain this supply within two years.
Daniel Yergin, president of Cambridge Energy Research Associates noted that, Success at these depths in the Gulf of Mexico would facilitate ultra-deepwater exploration elsewhere in the world because it will have proven the technology and capabilities.
Aside from these integrated oil drillers and producers, companies set to perform well are the oil and gas service companies required to build, upgrade and repair existing and impending offshore rigs and piping.
Apparently this industry has already taken off, as evident by recent stock quotes, but due to an industry average P/E of 15.95, companies still look relatively undervalued with relation to estimated growth.
This company is however something of an enigma for it boost an impressive operating margin of 35% compared to the industry average of 16.6% and yet only trades at an affordable forward P/E of 10.3. Interestingly, the company is as also a subsidiary of Helix Energy Solutions Group Inc which effectively holds 61,000,000 of the company 84,000,000 outstanding shares. When one couples this with the nearly 4 million shares sold short, DVR could prove to be a highly volatile and lucrative investment as we gear up for yet another eventful hurricane season.
Going forward I plan to add to my existing July $17.50 call options holdings.
2 comments:
I'm a big fan of your blog--you educate so many and that's exactly what I'd like to do with my upcoming book, An American Hedge Fund. I'd love to send you an advance copy for your review.
The hedge fund industry is now a $2 trillion industry and yet, due to industry regulations, the general public knows little about them. This needs to change and that's why I've written, "An American Hedge Fund," due to be published on October 1, 2007. I promise this not the typical boring finance book!
My claim to fame is that I turned $12k into $2 million trading waaaaay too many microcap stocks from 1999-2002, created a hedge fund, became the #1 Short Bias Hedge Fund from 2003-2006, starred in the TV documentary Wall Street Warriors (500 airings now!!), and began appearing regularly on CNBC all before the age of 25.
This is no BS "How To" book--its the true story of a hedge fund created from scratch. People need to realizes the hedge fund industry is not just about billion dollar blow ups and huge funds created by investment professionals who are already wealthy. My 'Rocky'-like story will surely inspire generations to come to take part in our true national sport, finance.
If you like it, I'd love to print a blurb with a mention to your site on the inside or back cover and hopefully you could post a review around press time in October.
my email is tim@timothysykes.com if you're interested
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