By Philip van Doorn, MarketWatch
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:
Lemonides called Transocean /zigman2/quotes/208905612/composite RIG +1.54% “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 $7, “two to five years down the road.” Maybe you should focus on the second of those year-range numbers.
Tidewater /zigman2/quotes/206335478/composite TDW -5.70% is “even more of a niche play,” Lemonides said, as it runs a fleet of offshore supply vessels. “Its share price has held up much better than the rest, probably because it was just too cheap, and secondarily you are seeing signs of an inflection in their business,” he added.
That inflection point represents the endpoint of Tidewater’s efforts to absorb its excess inventory of unused vessels, brought about by the collapse of oil prices in 2014 and 2015 and the consequent reduction in demand for ocean drilling. Once the inventory problem is solved, “profitability can explode to the upside,” Lemonides said.
“And you are starting to have credible arguments made that the supply/demand imbalance is starting to close. It is still early, but the share price is compelling,” he said, while calling Tidewater “the premier company in that space.”
Lemonides emphasized the importance of long-term discipline for this type of investment. “The willingness to be invested even though there is near-term volatility and compression is a huge advantage. If you are willing to look past the storms and are willing to be invested for the next two to five years, you can position yourself for two- to five-fold increases,” he said.
A broad investment in the oil-services space might be appropriate if you are confident that the industry cycle will eventually favor the subsector and if you don’t want to select individual stocks. Here are four ETFs that track the oil and gas services subsector in various ways:
|ETF||Ticker||Annual expense ratio||Assets under management ($ 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.
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