A Play on the New Gulf Drilling Boom

04/14/2010 12:00 pm EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, finds a small oil service company that’s ideally situated to profit from the opening of new offshore areas for drilling.

President Obama surprised energy insiders [by] announcing plans to open up new offshore areas in the Atlantic Ocean and Gulf of Mexico to oil and gas exploration. These measures will take years to exploit while, in all probability, don’t harbor a huge amount of oil and gas.

The federal government estimates there was between 7.5 billion and 40 billion barrels of oil and gas equivalent in the areas under drilling consideration for lease—about four years’ worth of US consumption. The large oil companies don’t drill when exploring; that job is contracted out to the oil drillers.

Where this gets interesting is when we start to examine “how” to extract potential oil or gas from deepwater sources off the US coast of Texas and Louisiana. I’m interested in finding a successful, profitable, and preferably small-cap company with operating leverage to oil and gas prices supported by a niche to develop offshore reserves.

Gulf Island Fabrication (Nasdaq: GIFI) has grown to be a worldwide leader in the construction of specialized structures and vessels used in the oil and gas and marine industries. The company provides its clients with a full range of construction and maintenance services in-shop and out in the field.

As the energy industry continues to push the envelope of deepwater exploration, GIFI is responding with innovation and state-of-the-art technology to meet the challenges ahead. GIFI’s coordinated capabilities and strategic locations along the Gulf of Mexico translate into greater efficiency and expedited project completion

Importantly, the number of drilling rigs currently in operation in the United States and overseas continues to rise following the depths of the credit crisis in late 2008 when activity plunged. The US rig count for February 2010 was 1,350, up [6.5%] from the 1,267 counted in January 2010 (+6.5%). The worldwide rig count for February 2010 was 2,982, up [7.5%] from the 2,773 counted in January 2010.
That’s bullish for drillers like GIFI. And as activity starts to swell in the Gulf, we should see an even larger rig count in 12-24 months.

Gulf Island Fabrication has come a long way. Gross revenues have surged more than threefold since 2000. Net earnings have grown from $4 million in 2000 to $21 million. And GIFI is cheap, trading at just 1.1x book [value] and 0.9x sales. Also, the company has almost no debt with more than $100 million in net cash through December 31, 2009.

GIFI is an aggressive speculation on the development of deep-sea oil and gas exploration in the Gulf of Mexico. The company has years of experience, a solid balance sheet and is strategically placed to exploit these new drilling initiatives [in the Gulf]. From an all-time high of $48.99 in June 2008, the stock is down 57%.

Buy Gulf Island Fabrication at market up to $23. (It closed at $21 Tuesday—Editor.) Place a 20% stop-loss on your entry price.

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