Price Has Strong Impact on Crude Supply

 | Sep 27, 2013 | 11:30 AM EDT
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Believers in the peak oil theory must be confounded by the huge increases in crude oil production in North America and other non-traditional oil producing nations over the past six to eight years. I believe this is because the theory doesn't thoroughly take into consideration the impact of price on supply.

At $20 a barrel, there surely is a limit of how much oil can be recovered profitably throughout the world. At $100 a barrel, however, new capital is raised, new technology is developed and new fields are brought online. At $200 a barrel, we may even see significant energy production increases from California, which actually holds more recoverable shale reserves than any other state in the union.

I have covered the production boom coming from the domestic shale formations many times in these columns. Another strong source of new supply in the years ahead will come from new fields off the shores of Brazil and Africa and perhaps even the Arctic Ocean, There will be continued production from the Gulf of Mexico and the North Sea.  This bodes well for the oil services firms that supply the technology, rigs, resources and supplies to those development efforts.

Here are two of these plays that are well-positioned in this space and are priced at attractive valuations.

Tidewater (TDW) provides offshore service vessels and marine support services through the operation of a fleet of marine service vessels. The company is experiencing significant revenue growth, especially from sub- Saharan Africa. Revenues are tracking to at just over a 15% gain this fiscal year and analysts project similar sales increases in FY2014.

Earnings are on an attractive trajectory. The company made just under $3 a share in FY2012, but looks to post earnings right under $4 a share this fiscal year. The consensus earnings estimate for FY2014 currently stands at over $5.50 a share.

Despite significant revenue and earnings growth, the stock sells for just over 10x forward earnings, a discount to its five-year average (12.5). The shares are priced just marginally over book value and yield 1.7%. Wunderlich initiated the shares as a "Buy" yesterday. Global Hunter Securities made a similar call earlier in the year.

Ocean Rig UDW (ORIG) is a Cyprus based oil services firm with two ultra deep-water semisubmersible drilling rigs and 8 ultra deep-water drill ships. The company is in the middle of an aggressive build out plan to serve the increasing demand for ultra deep-water drilling capability. At the end of this build out, the company should have the fifth largest fleet in this sub-sector of the industry. Being based overseas, the company gets little play in the domestic financial press.

Revenues are expected to accelerate sharply in 2014. The company should post sales increases just under 20% this fiscal year which should jump to approximately 60% in 2014 as new rigs come online. Most of the capacity for these new rigs is already contracted out for the next few years and the company has around $5 billion in its order backlog right now.

This is 2014 story as well from an earnings perspective. Analysts' current project that earnings per share should almost quadrupled over 2013's level next year with earnings of over $2 a share. This gives this fast growing concern a forward price-to-earnings ratio of just nine -- cheap given its growth prospects.

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