Looking To When Oil Rises Again

Having spent the better part of the week between the rivers, I am now back on the island. I hopped in the car this morning and drove down the turnpike listening to financial news radio most of the way. One thing is obvious from the reports and the market prices: I have been really, really wrong on oil.

In the long run, I think I will be proven to be just early, but right now I am wrong. I had meant to buy oil as it neared $40, but have been away from the computer the last several days during trading hours and never put the orders in to buy the U.S. Oil (USO - commentary - Cramer's Take) and U.S. Natural Gas (UNG - commentary - Cramer's Take) exchange-traded funds. If oil is down again today, I am going to consume a good quantity of antacid and make the trades. I will probably add U.S. Heating Oil (UNH - commentary - Cramer's Take) as well if it moves to a new 52-week low.

I am, however, still long several drilling stocks from early this year and I am down in them all. Since I have been staying small and slow all year, I have room to average down in these names, which I am probably going to over the next several trading sessions. Many of these companies are priced for a deep global depression and although the economy will stay mired for another quarter or two, the world is not going to end or repeat the 1930s. I am buying these stocks with a very long time frame and am willing to hold them for the next five years or more.

Being me, I am going to focus on the companies I can buy below tangible book value and where insiders have been buying stock. One of the leading candidates is Bronco Drilling (BRNC - commentary - Cramer's Take), which was the target of a failed takeover attempt at more than three times the current stock price. The stock trades for less than one-half tangible book value and has less than 20% debt-to-total capitalization.

Utilization rates for the company did fall last month, dropping to 81% of the total fleet, and may go lower in the months ahead given the low price of oil and gas. Insiders buying the stock recently seem to agree that the shares are cheap. Some noted value guys think the stock is attractive as well. Third Avenue Management has been adding to its already large 22% position in the stock.

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At the time of publication, Melvin was long BRNC and short TLT, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.