By Ian Wyatt, Growth Report
WASHINGTON (GrowthReport) -- Months after the three sisters of Katrina, Rita, and Wilma wreaked havoc on major oil and gas refining facilities on the Gulf Coast, crude oil continues to trade in the mid-$60s per barrel, easily within striking distance of its all time high.
In spite of a mild winter in the Northeast, concerns of potential supply issues in Iran and Nigeria have helped keep oil prices near record highs.
Think you've missed out on the oil and gas bull market? Think again.
While 2005 was a spectacular year for many oil and gas producers, exploration companies, and service companies, the future remains bright for many companies and shares of their stocks with valuations still looking relatively attractive even after big gains in the last year.
Service companies are perhaps the most attractive play on the oil and gas boom, as they are a bit more insulated against the daily fluctuations in commodity prices. These companies are likely to continue to flourish if oil is able to maintain its trading range of $60 -- $70 per barrel. However, we believe that demand for services in the oil and gas sector will remain strong even in the event that the price of crude were to fall to $40 per barrel, something that we believe is unlikely given the rising global demand for black gold.
Two of our favorite companies today provide services to oil and gas exploration companies.
Bronco Drilling is a land driller with operations in Oklahoma, Texas, and the Rocky Mountains. The company came public in August of last year. With oil and gas prices trading at high prices, demand for land drillers has also soared. Bronco is in the enviable position of having a total fleet of 62 land rigs as of September, including 30 active rigs, with the balance inventoried or undergoing refurbishment. With the company planning to bring an additional ten drilling rigs online in both 2006 and 2007, the future for Bronco looks bright.
Growing demand for land drilling services is resulting not only in Bronco running at capacity, but also increasing day rates, or the rates the company charges clients for one day of drilling. For the nine-months ended Sept. 30, revenues increased 195% to $38.9 million, with operating income swinging from a loss of $1.8 million to a profit of $3.4 million. Consensus analyst estimates call for the company to earn 62 cents per share in 2005 on revenues of $73 million. And expectations for 2006 look equally bright, with analysts calling for EPS to increase 218% to $1.97 on revenues of $234 million.
Another favorite of ours is largely unknown TGC Industries , the second largest geophysical service company in the U.S. Operating in a highly fragmented industry, TGC competes with the better known Dawson Geophysical /zigman2/quotes/202920744/composite DWSN -0.73% . TGC provides oil and gas exploration companies with seismic data to map the subsurface of potential drill sites in order to help better determine the best drill sites.
TGC has been expanding rapidly through the launch of additional crews to perform seismic field work to exploration companies. The company grew from two crews in 2004 to four crews in fall 2005. In November 2005 and January 2006, TGC added crews number five and six, providing the company with a roughly 12% market share in the seismic data and geophysical services sector. Each crew can generate roughly $2 million in revenues, providing TGC with a revenue run rate of roughly $12 million, or an annual revenue run rate of $48 million, a healthy increase over the expected $29 million in 2005 revenues. Estimating 2006 profit margins of 17%, we believe TGC can earn 55 cents per share. With shares trading at $9, the stock trades at 16 times our 2006 EPS estimate. The best part is that TGC offers investors not only faster expected growth than competitor Dawson, but also shares that trade at a discounted valuation.
While oil and gas stocks, including both discussed within this article, have posted outstanding gains in 2005, we believe there are more gains ahead in 2006. These two oil and gas services companies provide investors with high growth opportunities at attractive valuations, and should continue to thrive in the current environment.
Ian Wyatt is the editor of Big Idea Investor and Growth Report. Wyatt does not own shares in any of the companies discussed within this report. (bigideainvestor.com)