A Strong Bet, Crisis or No

You hear it everywhere: Stock tips and brokerage buy recommendations just are not working anymore. As one trader put it, "They're like manure." You don't have to be a brain surgeon to figure out why: We're in a treacherous market environment rife with uncertainty, and investors are understandably wary.

Well, if you're looking for a potential winner — no guarantees, of course — two of the most highly regarded investment newsletters around have come up with a name they feel fits the bill. It's Nabors Industries ($30.39), the world's largest oil and gas land-drilling contractor. Boasting a fleet of nearly 600 rigs, it posted 2005 sales of $3.4 billion.

Interestingly, the two newsletters — the Outlook, published by Standard & Poor's, and the Dow Theory Forecasts, based in Hammond, Ind. — each recently issued exuberant commentaries on the company, which also is viewed a potential beneficiary of the current shooting war in the Middle East because of its oil drilling and exploration activities. Even if the fighting should ease, it's felt that Nabors is in the right place at the right time.

Further, several pros I talk to favor oil services, theorizing that the ongoing search for new oil and gas reserves will assuredly continue strong, given the uncertainties surrounding future supply. Granted, the oil services sector is not undiscovered. Actually, it has been blazing, with stocks shooting up 79% over the past 12 months and at an annualized rate of 48% for the last three years.

What makes Nabors so appealing? For one, big projected earnings gains, with consensus estimates calling for a per-share profit increase of 70% this year and 34% next year. What's more, both newsletters look for hefty increases in the stock over the next 12 months. The Outlook expects Nabors to climb to $50, about a 56% rise. Dow Theory Forecasts' research director, Richard Moroney, tells me a $41-$45 price tag, or about a 34% gain, is a reasonable goal over the next year.

Mr. Moroney, who says consensus estimates could be low, believes earnings could actually rise as much as 78% this year and 30% to 40% next year. Noting the stock's sell-off from its 52-week high of $41.35 on fears of a drilling slowdown, he says he views the pullback as excessive. "Nabors is a very cheap stock if the tempo of drilling remains at current levels," he says.

Even if drilling were to slow, he views Nabors as a cheap stock, as the most pessimistic brokerage estimate for 2007 calls for $4 a share, which is equivalent to a paltry multiple of about eight times earnings.

Raising the issue of whether oil services can go on delivering lofty stock returns given the uncertainty surrounding future energy prices, Mr. Moroney argues that even if oil and natural gas prices fall, oilfield services companies stand to benefit from surging capital spending by energy companies. Oil and natural gas companies in the S&P 500 Index increased capital expenditures 66% in the March quarter, compared to 27% for the average S &P 500 company.

Mr. Moroney observes that Nabors is benefiting from a tight supply of land drilling rigs, which remain in high demand as producers work to capitalize on high energy prices and drill more wells. As a result, rig rates are rising. Last year, Nabors began building many new rigs, and it's felt that the additional supply should be quickly absorbed with little negative effect on pricing. The company already has contracts or letters of intent for about 70 of its 95 rigs under construction.

In the first quarter, day rates for American land drilling rose by $1,475 to $18,695 and cash margins climbed by nearly $1,000 a day to about $9,600, both record highs. In pitching Nabors, The Outlook contends there is room for further gains, given the greater drilling efficiency of current fleets, high commodity prices, and a scarcity of available rigs as new rig orders climb even higher. It sees 2006 revenue growth of about 34% and an operating margin of 35%. Yet another 15% revenue gain is pegged for 2007, as well as further margin expansion. The Outlook's projected 2006 earnings call for $3.35 a share, up from $2 in 2005, and another jump in 2007, to $4.09.

The bottom line from our bulls: Cuddle up to Nabors. You'll like the financial feeling.

dandordan@aol.com