Energy-service stocks have surged over the past 12 months, particularly since the start of this year. But deep-water drillers such as Transocean Inc. (symbol RIG) still hold potential, says Timothy Parker, an energy analyst at T. Rowe Price.
An increase in spending by the major oil companies and by exploration and production companies has powered an advance in the fortunes of energy-service firms. Not enough money was spent to find oil and gas in the past two decades. Now the oil and gas industry is making up for lost time, Parker says.
What's particularly attractive about deep-water drillers is that many of the new discoveries in oil and gas are expected in deep water. Transocean is the biggest of the deep-water drillers. So eager are major oil firms to drill in deep water that they have signed contracts leasing a Transocean rig for as much as $425,000 a day from mid 2007 to mid 2010, says Parker.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The stock isn't cheap -- which shouldn't be surprising given that Transocean is the biggest and best of the deep-water drillers. Transocean should earn $4 to $5 this year and $5 to $6 next year, Parker predicts. Using the $5 figure, Transocean, recently $82, has a price-earnings ratio of about 16. Parker also expects earnings to continue growth at a rapid pace.
Be aware, though: Like all energy-service stocks, Transocean is highly cyclical. It soars in good times and plunges in bad times. The sell signals to watch for are signs that the U.S. is entering a recession or that China's growth juggernaut is derailing. Either would likely slow the demand for new oil and gas. Don't just watch the company's earnings. By the time Transocean's earnings begin to fall, the stock will likely already have cratered.
--Steven Goldberg
-
Rally Fades on Mixed AI Revolution News: Stock Market TodayAll three main U.S. equity indexes opened higher but closed lower as a seven-session winning streak for the S&P 500 came to an end.
-
Stretch Your Holiday Shopping Budget Further with These Under-$50 Gifts That Don't Feel CheapAmazon October Prime Day is the perfect chance to nab some under-$50 gifts that feel more expensive than they are (because normally they would be).
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
How to Invest for Rising Data Integrity RiskAmid a broad assault on venerable institutions, President Trump has targeted agencies responsible for data critical to markets. How should investors respond?
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages — until it wasn't.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
