Looking To When Oil Rises Again

Shares of the world's largest land-based driller, Nabors Industries (NBR - commentary - Cramer's Take), are down almost 80% from the 52-week high. The company is tied closely to the price of natural gas, which has fallen alongside the stock. Most of the company's new orders and business have been coming from companies active in shale fields, a method that has higher production costs than other types of drilling. When natural gas rebounds to a point where shale drilling is more profitable, this stock will recover quickly.

There has been insider buying in the last month or so as well. The stock trades at around 80% of tangible book value at current levels. The company is expected to deploy 14 rigs in the next quarter, which should help provide a floor for earnings. National Oilwell Varco (NOV - commentary - Cramer's Take) is not trading below tangible book, but it is very cheap on price/earnings (5) and enterprise value-to-EBITDA (4). National Oilwell has been strong on an operating basis, which is expected to continue. In the last quarter, orders for drilling tools and equipment made by the company were a record $2.4 billion. The backlog of work grew 9% to reach over $11 billion.

The balance sheet gives National Oilwell a huge advantage over weaker competitors as well. Long-term debt is just 11% of total capital and the company has $1.75 billion in cash on the books. The stock is down more than 60% in the last year, which has attracted the attention of insiders as several have recently purchased stock in the open market.

It is bad out there. It is going to be a slower recovery than we all would like. I have said that repeatedly and have been bearish on the overall stock market all year. I have purchased stocks selectively when I thought they were too weak. But it is not the end of the world. The U.S. has a long history of overcoming adversity and we will again. If we don't, the last thing I will be worried about is my stock portfolio!

And, if I am wrong, my iShares Lehman 20+ Year Treasury Bond (TLT - commentary - Cramer's Take) short will more than offset my stock losses as investors dump treasuries!

Oil demand may weaken in the short to intermediate time frame. Looking out a few years, however, I think that demand will rise again. When it does, the energy ETFs and stocks I am buying today should pay off handsomely. Over my five-year-plus time horizon for these investments, I expect to do very well even if I have to endure some pain while I am waiting.

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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.