NEW YORK (
) -- For my No. 3 energy/
of 2010, I've already given you a refiner:
. For my No. 2 pick, I have an oil service company:
Picking energy stocks is no different from selecting stocks in other sectors. You either like momentum stocks (the ones that have good charts and hot money moving into them) or you're a value investor and look for underpriced and underperforming companies that are poised to make a turnaround.
I've always been a daytrader in oil, so I understand momentum. But for my portfolio and my loyal
readers, I try to recommend stocks that have longer-term potential and great stories to go with them. In this role I'm a value player, and nothing strikes me as having more value right now than Baker Hughes.
In oil services, the single most quoted metric is rig counts, and the rig counts for 2009 have been miserable, falling to an historic low of 876 in June. Those figures have done much to help depress shares of Baker Hughes and many of the other oil service stocks. Baker Hughes, which as recently as early 2008 was a $90 stock, now languishes at around $40.
Baker Hughes has always been the little sister to oil service leaders
. Investors looking to gain exposure to the sector often passed over Baker Hughes in favor of the larger companies.
In some ways Baker Hughes deserves its second-class citizenship. The company has been slower than Halliburton and Schlumberger to modernize and increase its international exposure.
But two things convince me that Baker Hughes is in the process of turning everything around.
First, the company recently acquired
in an accretive deal. BJ services will give Baker Hughes access to the more modern injection technologies it previously lacked, which will enable Baker Hughes to service many deeper and more complex well systems and withdraw more oil and gas from them. This is a deal that forcefully brings Baker Hughes into the 21st century and puts it on a more equal footing with powerhouses Halliburton and Schlumberger.
Second, every analyst report I read says that a growing shortage of oil service providers will become critical in late 2010 and 2011. Ole Slorer of Morgan Stanley, an oil-patch analyst I trust, has predicted that by mid-2011 every available rig will be in service. Already we can see that trend forming. Rig counts have gone up eight straight weeks and are now at 1160 for the week ending Dec. 11.
If that scenario plays out, oil service companies like Baker Hughes will not need to compete for business as much as find a robust stick with which to beat the customers away. If that happens, Baker Hughes' current share price will look awfully cheap.
This is a great value story. Baker Hughes is a stock that has had the fundamentals working against it and a depressed price, but now suddenly there are indications that things will get a lot better. Benjamin Graham and Warren Buffett would be proud. That's why Baker Hughes is one of my top stocks for 2010.
-- Written by Daniel Dicker in New York.
At the time of publication, Dicker owned Baker Hughes and Valero.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.