More Drillers, More Opportunities

One positive about all the recent market weakness is it may be providing some buying opportunities. Typically, at the end of the decline, we see the selling spread to the leadership areas, one of which is energy. This group, with only a recent mild pullback, has reached oversold levels on an intermediate-term basis. This has occurred while the price of crude oil has merely pulled back to support in the uptrend channel. Many individual energy stocks have also pulled back to support, as this bout of profit-taking has dragged them lower.

One stock in the group we like is Atwood Oceanics (ATW - commentary - Cramer's Take). This is a small oil and gas driller in the offshore market that owns and operates eight premium offshore rigs. Their mixed fleet includes four semi-submersibles and two premium jack-ups. Semi-submersibles are deep-water rigs that can drill down to 25,000 feet or more and jack-ups drill in shallow waters.

Atwood uses long-term contracts to help protect them from volatility in the market. This insulates them should a natural disaster, meaning a hurricane, were to hit. If that happens, Atwood still gets their money. The contracts are given to the highest bidder.

As of April, there were 362 offshore rigs operating, but there is still limited availability. Almost all of the units are being completely utilized, which means that oil companies are willing to pay almost anything to use them. Atwood currently has two units under construction, and as you would expect, is having no trouble getting bids to put them to work.

Within the next three years, it is expected that the most expensive deep-water rigs could reach $600,000 a day. Drilling contractors like Transocean (RIG - commentary - Cramer's Take) and Atwood benefit from higher day rates, which are based on what type of unit a company has. Atwood is building a jack-up that costs $165 million and a semi-submersible that costs them about $700 million.

Although this industry is strong, there are still some risks. Drillers work in parts of the world that are usually politically unstable, which disrupts business. Another challenge is replacing the retiring employees. There is an inefficient amount of manpower available to operate the rigs.

Atwood Oceanics

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It is no surprise that the technical structure of Atwood is constructive. The stock has been trending higher in methodical fashion. This type of rally prevents the stock from becoming too extended and avoids volatile declines. After rallies, there have been consolidations lasting two to three months, allowing the stocks to rebuild for the next leg up.

The most recent advance took the stock to new all-time highs, and the subsequent pullback has brought the stock back to support in the $100-$105 area. This level also represents the intermediate-term uptrend, and as long as the stock stays above this level, the trend is up.

We would look to be a buyer at current levels or additional weakness to the $100 level, with upside potential back to the recent highs in the $120-$125 level. If the $99-$100 level is broken, we would look to sell long positions at that level.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.