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A Superior Route to the Oil Patch

Editor's Note: This is a bonus story from Jon Markman, whose commentary usually appears only on RealMoney . We're offering it today to readers. To read Jon Markman's commentary regularly, please click here for information about a free trial to RealMoney.

As crude oil flits back toward the $50 level and perhaps beyond, a lot of investors who slid out of energy stocks may be lured back in. For those who aren't quite sure if they're doing the right thing, an alternate (some might say chicken) way to play the group might be through the shares of Superior Energy Services (SPN - Get Report), a cheap and fast-growing company out of Harvey, La.

Superior provides a variety of oil-field services to drillers in the Gulf of Mexico, particularly the big shots such as ChevronTexaco (CVX - Get Report). But what sets the company apart from other services providers is that it has a unique and successful oil-and-gas production business of its own that it scrounges from the discards of its services clients.

Don't look at its trailing price/earnings multiple of 38, as it's not that expensive. Its forward multiple on 2005 estimated earnings is around 16, which compares nicely with growth that is in the mid-20% range year after year.

P&A Protects P&L

What makes Superior's services business distinctive is its focus on the work called P&A in the industry, which is short for plug and abandonment. If energy prices crash next month and all the big drillers need to close up their Gulf rigs, then Superior is the outfit they would call. The company floats in on its fleet of boats, plugs the wells and prepares them for abandonment. And if that scenario doesn't happen, there's still a lot of business for Superior's conventional tools, field management and rental business.

Meanwhile, the company has a lot of upside potential from higher energy prices if the market continues on its current track. Through a subsidiary, SPN Resources, Superior owns and operates properties on nearly 40 blocks in the Gulf, including 50 structures and 380 wells -- about half of which are producing oil and gas. These are not just any properties. They are acquired on the cheap -- in some cases, essentially free -- because they are largely depleted fields of little use to majors like Amerada Hess (AHC) and Unocal (UCL). Superior puts its crews to work in seasonally slow periods to rejuvenate them enough to eke out sufficient production to be worthwhile to the much smaller operation.
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