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May 31, 2019, 8:58 a.m. EDT

Investors’ patience with oil-services stocks could be richly rewarded

A long-term investment could lead to gains of at least 100%, according to one money manager

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By Philip van Doorn, MarketWatch

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Two favorite stocks and four ETFs

Lemonides of ValueWorks said a slowdown in drilling activity would likely be “a pretty quick self-correcting phenomenon.”

“If activity slows, production slows, and then prices head higher, and we start the whole thing again,” he said in an interview May 28.

“Up to now we have been mostly keeping our powder dry” in the energy space, he said, but ValueWorks has positions in two oil-services companies:

Transocean

Lemonides called Transocean /zigman2/quotes/208905612/composite RIG -2.88%  “very compelling” because the shares are “trading arguably” at a quarter or a third of the replacement cost of the company’s vessels, in his estimation. “At some point it will come back to replacement value. So the upside on the shares is three to eight times your money,” he said.

That is a big potential, which is why it isn’t surprising that Lemonides said: “We don’t get too sensitive on time periods.” He expects the shares eventually to rise to $30 to $40 from the current levels of below $7, “two to five years down the road.” Maybe you should focus on the second of those year-range numbers.

Tidewater

Tidewater /zigman2/quotes/206335478/composite TDW -0.29%  is “even more of a niche play,” Lemonides said, as it runs a fleet of offshore supply vessels. “Its share price has held up much better than the rest, probably because it was just too cheap, and secondarily you are seeing signs of an inflection in their business,” he added.

That inflection point represents the endpoint of Tidewater’s efforts to absorb its excess inventory of unused vessels, brought about by the collapse of oil prices in 2014 and 2015 and the consequent reduction in demand for ocean drilling. Once the inventory problem is solved, “profitability can explode to the upside,” Lemonides said.

“And you are starting to have credible arguments made that the supply/demand imbalance is starting to close. It is still early, but the share price is compelling,” he said, while calling Tidewater “the premier company in that space.”

Lemonides emphasized the importance of long-term discipline for this type of investment. “The willingness to be invested even though there is near-term volatility and compression is a huge advantage. If you are willing to look past the storms and are willing to be invested for the next two to five years, you can position yourself for two- to five-fold increases,” he said.

A broad investment in the oil-services space might be appropriate if you are confident that the industry cycle will eventually favor the subsector and if you don’t want to select individual stocks. Here are four ETFs that track the oil and gas services subsector in various ways:

ETF Ticker Annual expense ratio Assets under management ($ million)
VanEck Sectors Oil Services ETF OIH 0.35% $645
SPDR S&P Oil & Gas Equipment & Services ETF XES 0.35% $165
iShares U.S. Oil Equipment & Services ETF IEZ 0.43% $119
Invesco Dynamic Oil & Gas Services ETF PXJ 0.63% $16
 

The ETFs follow various methodologies. Before considering any of them, you need to do your own research and assess an ETF’s strategy for yourself.

Don’t miss: These 6 stocks in the S&P 500 are down at least 50% — and analysts say buy

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/zigman2/quotes/208905612/composite
US : U.S.: NYSE
$ 4.68
-0.14 -2.88%
Volume: 8.40M
Nov. 19, 2019 3:12p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.95 billion
Rev. per Employee
$448,507
loading...
/zigman2/quotes/206335478/composite
US : U.S.: NYSE
$ 13.70
-0.04 -0.29%
Volume: 99,246
Nov. 19, 2019 3:11p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$539.03 million
Rev. per Employee
$73,913
loading...

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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