Dirty Messy Energy

 | Sep 11, 2012 | 4:00 PM EDT  | Comments
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Stock quotes in this article:

xco

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teso

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nbr

Last night I spent some time thinking about other businesses and industries I might want to be in for the long term. I do not invest based solely on trends and expectations but I do keep lists of stocks that I think will benefit from social, demographic and economic trends over the next decade. If and when they fit the definition of safe and cheap, I will gleefully buy them as I get a chance to double dip on value and anticipated growth opportunities.

I know many people who think that the alternative and green energy technologies are the place to be and I agree with them -- to a degree. However, the time and place to be in that business is still a long way away as the technology is not yet capable of providing the majority of our energy needs. At some point in the future I can see solar, biofuels, wind and other technologies covering the bulk of the energy demand, but I think that will happen in my son's lifetime, not mine. So for now, and the next two decades, I want to be in the messy, dirty, grimy energy business -- the one that digs up oil, gas and coal to meet the energy demands of the nation. Lower-cost energy form domestic sources can go a long way toward boosting out economy; at some point, our energy policy will reflect that fact.

I want to own stock in a company like Tesco (TESO) for a long time. The company provides drilling technologies and services including top drives and tubular services. It sold its casing segment to Schlumberger (SLB) in April for $45 million in cash. The company pretty much invented the top drive rental market and continues to dominate that space. Management has repeatedly stated that they are aiming at becoming the No. 1 provider of top drive by 2015. They are also committed to further international expansion, particularly in the tubular services division. As Schlumberger continues to roll out case drilling units, Tesco will likely pick up incremental tubular products business due to of its familiarity with the new technology.

The company has enormous growth potential, but the stock is cheap at the current time. Tesco shares trade right at tangible book value with no long-term debt and a current ratio of almost 3. The company has a Z score above 4 and an F score of 6, so it passes the standard metric for credit and potential. Viewing this though my going concern lenses, the stock trades at an EV (enterprise value)/EBITDA (earnings before interest, taxes, depreciation amortization) ratio of less than 4 and at about 60% of my intrinsic value calculation. If energy demand were to pick up in the future, a takeover announcement by a larger competitor would not surprise me.

The stock has fallen as a result of missing earnings and revenue expectation and is currently trading near its 52-week lows. I think you can either begin buying the stock outright at the current price or consider trying to sell the December $10 puts between the bid and the ask of $0.70 to $0.90. If you do decide to sell the puts, use day orders only and check you option pricing daily until filled.

A recovering global economy will eventually drive energy demand. We are going to need to dig and drill to meet that need on a cost-effective efficient basis. I want to be in the digging and drilling business by owning companies such Tesco that provide the tools as well as those that use the tools, such as EXCO Resources (XCO) and Nabors (NBR). Economic perceptions and oil market realities will provide some steep selloffs that will generate multiple chances to own the oil and gas business on a safe and cheap basis. I want to be ready to take advantage of every opportunity Mr. Market creates.

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