Drilling for Profits

06/23/2006 12:00 am EST

Focus:

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

As we go through the much-needed but mucho-ugly corrective phase of this bull market, we want to take advantage," says Tobin Smith, editor of ChangeWave Investing. "We’re buying a new stock in the energy services area." Here’s his look.

"A new favorite in the energy services sector is BJ Services (BJS NYSE), the lowest-priced leader in the pressure-pumping services sector that is getting more profitable each day. BJ Services is headquartered in Houston and is involved in pressure pumping and other services for the oil and natural gas industry around the world. Their services run the gamut from onshore and offshore work with new and existing wells, and they work with companies both large and small. They cover all the bases and have been in the business since 1872 so they know what they are doing.

"There’s no denying that right now, the fog in this market is thicker than an English bog. And when there's fog this thick in the market, you've got a virtual lack of visibility regarding the future prospects for nearly all stocks. But even in the midst of the densest of market fogs there are always a few stocks that are able to cut through the lingering uncertainty, and BJ Services is one of those companies.

"Management had guided 2006 earnings to around $2.10 a share, but based on my model, these numbers are more like $2.25 or $2.30. The company is adding capacity right now, which will fall to the bottom line this year but 2007 really reaps the benefits. And all of its business is basically contracted already; any new business is purely a function of adding new capacity. They turned away business worth $12 million per month in the first quarter. Nice problem to have, eh?

"Earnings per share for the first quarter of this year were 47 cents vs. 27 cents in the year-ago period. The leverage in this business model is huge; increase revenues 32% and get an increase in earnings of 87%. I believe that if you're only going to add one oil services stock to your portfolio for the next six months, BJS should be the one."

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