Yesterday I swapped my holdings in Patterson-UTI for Noble Corp. I also reduced my holdings in SPX Corp, which has been a great turnaround play for me. I sold 20% of my position, which I do to rebalance to a target weight. This limits my risk, and given that nothing moves up in a straight line, it allows me to add 2-4%/year to my returns. For more information ion this sort of trade, for those that have access to RealMoney, see this article.
As for the swap, have a look at this article from Forbes. I see reason to swap to a cheaper name, when earnings trends are working in favor of deep water drillers. If oil prices rise a great deal, I will be proven wrong here, but at current oil prices, I like the swap.
Full disclosure: long NE SPW
Update: now, what should happen after I sell PTEN but that it puts up decent, but not stupendous numbers, and it goes up 5%. The relative return difference since the swap is -3%. I don’t play for days, so this does not bother me. My methods work on average over the intermediate term. The proper measurement period for this swap is over the next 1-3 years.
Thank you for referencing the article.
I like the oil & gas service companies, and fairly recently decided to diversify my exposure with a deep water driller rather than adding to an underwater NBR position (pun unavoidable). I my short list ended up being RIG, DO, NE, GSF, and NOV. NOV was my first choice, but that ran up too quickly. I ended up buying DO, but based on Mr. Syed’s opinion I’ll revisit that decision.
Thank you for referencing the article.
I like the oil & gas service companies, and fairly recently decided to diversify my exposure with a deep water driller rather than adding to an underwater NBR position (pun unavoidable). I my short list ended up being RIG, DO, NE, GSF, and NOV. NOV was my first choice, but that ran up too quickly. I ended up buying DO, but based on Mr. Syed’s opinion I’ll revisit that decision.
NBR has been no fun! When you look at the opportunities in deep water it seems to me from reading that; 1) GOM rig pricing has stabilized and both jack-up and deepwater rigs are leaving for other markets. 2). Every one agrees that deeper water is the opportunity for the industry to build up capacity and put rigs under long term contract; this is the source of future increased profitability; 3) Forward earnings on these stocks are low; lets say between 11 on the high end (RIG) and 8 on the low (ESV). I’ll be honest and admit it is beyond me why these stocks misprice against each other other than the simplistic; eg, ESV is GOM shallow drilling while RIG is international deep water. David is probably the most experienced guide to this; but which factor is more meaningful to pricing these stocks; backlog? potential margin expansion? the simplistic view as stated above? financial stats such as Return on Capital Employed? The upside should be real similar but that is clearly not the case. Cash flow is strong enough that the corporations are buying back stock and also increasing CAPEX for upgrades/new deepwater rigs. I’m not sure what “the Street” or “the mutual funds” are looking for with regard to these measures.
Nabors has been no fun at all, but better than JRCC and MRH, at least! Hopefully a turn isn’t too far away if Cimarex and Chesapeake are any good as tells.
My take on the valuation question is the simplistic one. It seemed to to me that the companies with a greater proportion of semisubmersibles and drillships in their fleets vs jackups (ATW, RIG) had higher valuations than those with lower proportions (DO, NE, GSF) – at 20 x trailing 12 months/8 x estimates and 16 x trailing 12 months/7 x estimates, respectively. Some of the difference is probably related to the rates and duration of the contracts the companies are under, too.
Personally, I’m not going to try not to overthink it. Maybe it’s a stretch, but it reminds me of the situation PD was in 2004. Everyone assumed that copper prices over $1.4/lb were unsustainable, and that it was going to lead to a bunch of dormant mines being brough online. But the costs to get a mine going again skyrocketed (compare JOYG and NOV performance since 2004), and buyers were willing to pay higher copper prices than a lot of observer thought possible. Just substitute “copper prices”->”day rates” and “dormant mines”->”new deepwater rigs”, and that’s were I see the deepwater driller right now (the exception being the interest rate environment).
That was great insight and seems pretty reasonable to me; Ensco conference call supports better pricing for jack-ups in the future in my opinion for the Gulf. Transcript is available on their website and they really go out of their way to provide info to investors; too bad no one on Wall Street really believes it!!!