This market can turn on companies in a fashion that's so brutal it can take your breath away.
Last week the "Mad Money" crew did our show from an Ensco (ESV) rig, a shallow-water drill ship built in 1985 that's in strong demand from several of the independents plumbing the depths off the coast of Louisiana. While we were on the rig, we chatted with some executives who showed us how day rates -- the key metric -- have been holding up extremely well despite chatter on Wall Street that they were weakening fast. That was a big reason why Ensco recently doubled its dividend. The conviction and the contracts enabled the company to shell out a huge $3 a share, giving the company slightly more than a 5% yield.
Guess what? Now it yields 6.23% and it isn't because the firm raised its dividend again. It's because the Wall Street analyst community basically has determined that Ensco, along with the other off-shore oil drillers, are foolish and absurdly optimistic. The Street and its followers have decimated the group with Transocean (RIG), with a much older and vulnerable fleet than Ensco, giving you a 5.7% yield and a similar company that's been totally left for dead, SeaDrill (SDRL), down 18% this year, now yielding 11%.
On the other hand, the analysts have fallen head over heels for the once-scorned on-shore plays, notably Halliburton (HAL), Baker Hughes (BHI) and Patterson-UTI (PTEN). Just this morning, Goldman Sachs sings the praises of that trio, pointing out that the long-awaited turn has come.
Yes, it is absolutely true that there is more aggressive on-shore drilling, mostly because of the phenomenal finds in the Permian, Eagle Ford, Niobrara and Bakken shales.
And it is true that day rates for off-shore rigs have leveled off and in some cases have grown weaker. The Ensco people may say that things are holding in and even trending up right now, but there are a large number of new rigs being built that will put pressure on day rates unless Brazil and Mexico, the two big unknowns, start aggressively drilling, something that hasn't happened yet even as many thought 2014 would be the year for their gigantic programs to kick in.
But here's where I take issue with the newfound love for the onshore names. It comes after massive moves have been made. Now with Patterson-UTI up almost 18%, we get this powerful Goldman upgrade? Halliburton up 11% and Baker Hughes up 13% now draw the fawning attention of the Street?
In the meantime, Ensco, off about 16%, draws the scorn. Seadrill, which has plummeted 18%, can't catch a break. Transocean, down 21%, is despised. Where were these downgrades when the stocks were so much higher? Where were the upgrades when the on-shore plays were so much lower?
This action is precisely what I don't like about Wall Street. The analysts tend to be trend followers. And while I sense that Baker Hughes, Halliburton and Pattterson-UTI have the momentum that every hedge fund craves, and the off-shore plays are ice cold, I question the value proposition of the hot names.
Sure, the off-shore companies may have yields that are too outsized, but given that Ensco just doubled its dividend, I am not concerned about, say, an imminent cut in the payout.
So, you can go with what's steaming, knowing that you've missed big moves, or you can go with value, and wait it out until the big drilling programs kick in, knowing you have those very large dividends in your favor. I know what Wall Street wants. They want to get rich quickly. Me? I am happy to get rich slowly, because there's much less of a chance of catching a bottom than being eviscerated by a top.