Of all the energy names that have been mercilessly hammered as the stock market has recently moderated, none have gotten more beaten up than the drillers. The Oil Service Energy Index ( OSX) is off close to 25% while the S&P 500 is down a bit more than 11% over the last three months. And it is here that perhaps the greatest opportunity lies, in a sector that has been universally sold based on the sinking of the Transocean deepwater Horizon rig and subsequent Gulf of Mexico oil spill. Day rates for offshore rigs, which have never been cheaper, really have only one way they can go - up. And onshore drilling, particularly horizontal pressure pumping services have been on fire, literally turning away fracking work. There's an opportunity rapidly emerging in both spaces. The April 20 fire and 75-day-old spill that continues in the Gulf of Mexico has had a continuing negative effect on the off-shore drillers, and not just for Transocean ( RIG), the owner of the doomed deepwater horizon rig. A moratorium on new drilling permits in the Gulf, overturned recently by a Louisiana judge but put immediately back into place by the Obama administration, has put the future growth of offshore drilling in the Gulf of Mexico very much in doubt. Day rates, the amount that oil companies pay oil service companies to use their drilling equipment, have plummeted to levels not seen since 2006. This has happened as offshore drillers had been gearing up for a huge growth spurt both in the Gulf of Mexico and in the Atlantic, where the president in March gave the go-ahead to offshore drilling exploration. All of this, derailed by the BP oil spill, has sent shares of the major offshore drillers reeling, including Diamond Offshore ( DO) and Ensco ( ESV). These shares are trading as if we are about to abandon offshore drilling forever in the GoM, an impossible outcome. A quick capping of the Macondo blowout with a relief well that is now running ahead of schedule would have shares of these two off-shore specialists, along with rig owner Rowan ( RPC) rallying smartly. This is a high-risk, high-reward play on an intersecting well and cementing being accomplished not only on the first try, but also long before the end of August. If you're asking, this is not a trade for the faint-hearted.
But onshore drillers have been equally pummeled while their prospects have only gotten better recently. Particularly in pressure pumping operations used for oil and natural gas shale plays, the onshore names have reached their limit on capacity and are being forced to turn away business. That is why the sale of Key Energy ( KEG) services' pressure pumping division for $237 million dollars to Patterson - UTI ( PTEN) yesterday was followed by a 7% move up in the shares of PTEN. The largest cap names in pressure pumping -- Schlumberger ( SLB), Halliburton ( HAL) and Baker Hughes ( BHI) -- are exposed to varying degrees to off-shore and the GoM, but still rely primarily on their onshore drilling operations for the majority of their profits. If you were looking for an almost exclusive play for onshore pressure pumping, the well-run and dirt cheap Nabors Industries ( NBR) might be the best drilling play out there right now, in spite of a less-than-stellar earnings call last Wednesday. Pressure pumping demand is an indicator that the natural gas and oil shale plays are where the action of the future is headed. I'll save that discussion for another time, but first things first, you'll need the drillers to get at these resources and both the on- and off-shore oil service companies have been unreasonably pummeled by the BP spill. There's no reason to get overly confident and bet the farm, because a lot can still go wrong in the gulf during hurricane season. But with more going right -- successful containment efforts, super-skimming supertankers and a relief well that seems ahead of schedule -- there may be an opportunity to buy drilling stocks at bargain basement prices. Take a look.