Love Thy Nabors

I also think the oversupply of land rigs will be relatively short-lived. Secular changes in reservoir characteristics have made dry gas production much more drilling-intensive than it was in the past. We are barely keeping dry gas production flat, with double the rigs from only a few years ago. Canada looks almost ready to decrease its gas exports to the U.S. as it consumes more in heavy oil production. Heck, in 2008, we might even need those 200 or so net rig additions to the fleet just to stabilize a declining production base.

So avoid the naysayers on this group. Forget about the short-term estimate cuts that will happen as day rates continue to correct. Nabors' earnings-per-share estimate for 2007 is around $4, and the stock is trading at about $30. The average stock in the Value Line universe trades for 18 times 2007 estimates, so even if Nabors makes only $3 a share, its stock still looks cheap. Can Nabors and its brethren appreciate as earnings estimates fall? Well, look at the heavy-duty truck companies, some of which are posting 25% EPS declines this year. Ask yourself why they are on the new-high list.

I believe investors and analysts will begin to look past the 2007 dip very shortly. And 2008 can be a very good year for drillers, especially if the natural gas strip holds at $7.50 to $8.50, which is where it is now. A 12 to 14 P/E ratio on Nabors' 2008 EPS estimate, even if it's only $4, gets the stock into the $50s. That's upside comparable to my Cummins trade.