Jensen: Returning to the Oil Patch

The energy sector has been very kind to my portfolio over the past six weeks. I have been fortunate enough to be rewarded for loading up on a lot of the beaten-down names in the refining, exploration and oil service space at the end of the second quarter as they were being dumped by money managers for quarterly window dressing. Refiners such as Valero Energy (VLO) and Phillips 66 (PSX) have added another 15% of performance since I profiled them a few weeks ago. I have also benefited from the performance of some of the larger oil service names I have had in the portfolio since the end of June, including Halliburton (HAL) and Schlumberger (SLB).

I am taking some profits in some of these large-cap names, as they have had some huge run-ups in a short amount of time. I will be looking to redeploy some of this cash to some smaller-cap names in the oil service area on the next market pullback because I think they still have upside. Here are two stocks in the sector that are due for a much better fiscal 2013 than fiscal 2012, have had recent insider buying and have good growth prospects in front of them. Hercules Offshore (HERO) provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry worldwide.

Four reasons HERO is a solid speculative pick at $4 a share:

• Insiders were active buyers of the stock in June. Securities regulators also just dropped a probe into allegations of bribery involving a subcontractor, which should remove an overhang on the stock.

• The stock is cheap at just 70% of book value and less than 2x the $2.29 a share it earned in fiscal-year 2007.

• After several years of losses, Hercules is expected to return back to the black in fiscal 2013 with earnings of $0.26 a share on a projected 30% rise in revenues. Consensus earnings estimates for fiscal-year 2013 have move up smartly over the past three months.

• The stock looks like it recently bottomed and just crossed its 100-day moving average.

Atwood Oceanics (ATW) is an offshore drilling contractor that engages in the drilling and completion of exploratory and developmental oil and gas wells worldwide.

Four reasons ATW has upside from $45 a share:

• The stock experienced net insider buying in the second quarter with a director buying $180,000 worth of shares in June.

• The stock is cheap at just 9x forward earnings and ATW is selling near the bottom of its five-year valuation range based on P/B, P/S and P/CF.

• The company has easily beat earnings estimates for the last two quarters and estimates for the fourth quarter have started to move up over the last month.

• Investors are getting a fast growing firm at a discount right now. The company has grown revenues at a 14% annual clip over the past five years. Analysts have it increasing revenues at more than 15% this year and almost 30% in fiscal 2013. The stock has a five-year projected PEG of just 0.58.

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