Four Ways to Win with this Drilling Services Company
This discounted OFS stock is well positioned as oil drilling activity inflects higher
The Strait of Hormuz is still closed as we enter the eleventh week of the disruption, with at least 10 million barrels per day of oil production still shut in.
As global trade flows have rerouted, onshore commercial inventories are declining precipitously. Last week, the U.S. saw another large petroleum inventory draw, bringing the last four-week drawdown to the largest on record since the EIA began tracking the data in 1990:
Even if the Strait reopened today, U.S. inventories would likely continue significantly declining for months, as rerouted ships complete longer voyages and trade flows take time to normalize:
This massive oil supply shortfall, the largest in history, will require much more future oil production to make up for it. To produce more oil, producers will need to drill more wells. And to do so, they will need to hire oilfield services (OFS) companies to supply drilling and completion equipment and services.
One OFS company in particular has lagged the group, now trading at a steep discount to its peers. Recent estimates from a leading investment bank show just how cheap this company’s stock is, measured by consensus free cash flow:
In my view, this discount is unwarranted. It provides a wide margin of safety and much more upside potential if the company simply begins to trade closer to peers.
As we progress through the early stages of what looks like a large drilling up-cycle, this company has several ways to win that together promise substantial upside from the current price. Even modest activity improvement and a re-rating toward the peer-average cash flow multiple imply significant upside:
This is my latest idea - the 15th I’ve published so far here on Bison Insights. The prior ideas have mostly performed well, and I’m excited to share this one:
Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance is not indicative of future results.
