My Latest Stock Idea Explained Simply
This discounted oilfield services company is well positioned as oil drilling activity rises
When oil prices rise, oil companies usually want to produce more oil. To produce more oil, they have to drill more wells. To drill more wells, they need drilling rigs. They need special tools. And they need workers who know how to use those tools. The companies that provide this equipment and support are unsurprisingly called oilfield services companies.
When oil prices start to rise, this sub-sector historically has outperformed. Oil prices have risen by a lot over the last several months, but one small oilfield services company in particular still looks very cheap. As producers drill more wells, this company should get more work. As it wins more work, free cash flow will rise, potentially much higher than current estimates show:
A second tailwind is better profit margins. In the past, this company has sometimes had to rent tools from other companies to complete jobs. Renting tools costs money, which lowers profits.
But over the last several years, the company has been buying smaller competitors and also bringing more tool manufacturing in-house. That means it now owns more of the tools it needs for its jobs.
As the company uses more of its own tools instead of rented ones, it keeps more of the money from each job. The same work becomes more profitable. And as those profits improve, the market should begin giving the stock more credit.
As I see it, this company’s stock has four ways to win:
more work,
higher revenue per job,
better margins,
and a higher valuation.
The stock does not need everything to go right. Even if drilling only improves modestly, the company can still do very well by improving margins, paying down debt, and continue buying back stock.
But if drilling activity rises at the same time, the upside could be much larger:
This is my latest idea, and the 15th I’ve published so far here on Bison Insights. The prior ideas have mostly performed well, and I’m very excited about this one, which I have made a large position for myself:
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.
