Driller Is Good Play on Markets’ Rise

05/01/2008 12:00 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Global Bull Market Alert, says that as markets rebound the strongest stocks and sectors, like oil drillers, should do best.

As global markets gradually confirm a new up trend, I've started to recommend positions in the strongest stocks in the strongest sectors. This week's Global Bull Market Alert pick, offshore oil driller Atwood Oceanics (NYSE: ATW), is just such a stock.

Atwood Oceanics engages in the offshore drilling of oil and gas wells worldwide. It operates eight offshore mobile drilling units located in six regions of the world, including offshore Southeast Asia, offshore Africa, offshore India, offshore Australia, the Black Sea, and the US Gulf of Mexico. Although it has had a big run recently, here's why I think Atwood will continue to perform strongly in the coming months.

Atwood is a leveraged play on the price of oil. [Crude’s recent all-time high near $120] a barrel blew past the original estimates of major investment banks. Commodities guru Jim Rogers recently predicted that oil will soon hit $200. Amid record high oil prices and dwindling supplies on land, the Shells, Exxons, and BPs of the world have to venture into ever harsher and more remote environments offshore to replenish their oil reserves. That puts offshore oil drillers like Atwood Oceanics in the catbird seat.

As a result, day rates for Atwood's rigs are exploding. For example, one of Atwood's rigs is currently working for BHP Billiton at $170,000 per day. In May, that figure jumps to $360,000 per day for a one-well job for Eni SpA. Next, it's $405,000 per day for two years with Woodside Petroleum, and finally, it'll be around $450,000 for Chevron into early 2011.

And with only 37% of the company's rigs booked up for 2009, and some rigs in the industry already fetching rates of up to $600,000 per day, the opportunity for ever-higher day rates is enormous. No wonder Atwood's earnings grew at a breakneck 128% last quarter! 

Atwood also is in a strong sector, and the stock has just broken out from its trading range. That means Atwood should continue to move up despite its recent substantial gains. The company is also relatively small, and has zero debt, making it an attractive takeover candidate for larger competitors like Transocean (NYSE: RIG).

So buy Atwood Oceanics at market today and place your stop at $82. (The stock closed below  $101 Wednesday—Editor.) Aggressive investors may want to buy the September $120 call options, ATWID.X.

The biggest risk I see in the stock during the short term is that it is technically overbought. At the same time, with global fund managers sitting on record levels of cash, stocks like Atwood will continue to skyrocket on the back of improving market sentiment.

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