Diamond,
Drilling companies and chips are similar in that they are both cyclical growth companies. This means that your success in investing in them is likely to depend on where you are in the cycle and how the investment community is appraising where you are in the cycle. Though we're going through a short-term drop in crude prices, we don't have the kind of overcapacity among the drillers that signals a cyclical top. If anything, weak crude prices are likely to slow the arrival of that top, since many companies will slow their expansion programs.
Also, although the market seems to treat drillers as a group, there are differences among the individual companies. Land vs. offshore, deep vs. shallow drilling, oil vs. gas drilling -- these all affect how companies do. While they're all in the same ocean, they're not necessarily in the same boat. Notice the performance of RIG, which was one of the strongest companies in the recent rally and today had the smallest decline today among the offshore drillers (2.7%). Its particular strength is in its long-term contracts, which essentially mean it can ride out the decline in oil prices with little or no impact on its earnings even if many production budgets get cut back. I think a similar case can be made for companies more active in natural gas drilling. The gas market is a more locally-oriented market than oil. It is less impacted by OPEC production increases or drops in demand in Asia than crude prices are. The strength of natural gas prices may keep much of the Gulf jackup drilling going strong even if crude prices remain weak. So, while many may opt to sell their drilling stocks in hopes of buying back lower, an alternative strategy is to hold companies likely to outperform while crude prices are weak with a readiness to jump into the others when there are clearer signs of crude strengthening. My guess is that the deepest drillers such as RIG and DO and perhaps the gas-oriented jackup drillers such as ESV may do best in this environment. I think that makes them the best buy and hold candidates for those who don't sleep easily. For those with lots of patience, the land drillers may pay off the biggest down the road, but there are likely to be lots of bumps and dips along the way.
Baird |
