The Silver Lining in the Drillers' Cloud

06/07/2010 1:00 pm EST

Focus: ETFS

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says the drilling moratorium in the Gulf of Mexico has crushed oil service stocks, but they’re starting to look like a bargain.

President Obama has imposed a six-month moratorium on Gulf of Mexico drilling following the biggest oil spill in US history.

Some believe that the ban—which includes other areas in waters deeper than 500 feet, and temporarily prevents new drilling off of Virginia and Alaska—could be extended by up to a year.

BP (NYSE: BP), which runs the crippled rig that exploded back in mid-April, [has made some progress in plugging] the leak. Analysts project the spill might be ten times greater than the 1989 Exxon-Valdez disaster.

Since the advent of the energy bull market in 2003, no other subsector of the energy complex has produced greater total returns than oil services companies. Right now, the sector is taking it on the chin, [as] the baby is getting thrown out with the proverbial bathwater.

But for investors who are patient, there’s a great deal of opportunity to be found.Large-cap oil drilling stocks have now plunged almost 30% since May 1st and continue to lose technical support after [the recent] Obama flip-flop on oil drilling in the Gulf.The Oil Services HOLDRs (Amex: OIH) exchange traded fund has declined 21.4% in 2010 and is down 14.3 % over the last 12 months.

This week brought an outright market massacre for some of the biggest names in the business: Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL) and Diamond Offshore Drilling (NYSE: DO), to name just a few of the casualties. Smaller drillers listed on the Nasdaq [Composite index] were pulverized, declining more than 10%.

When markets take it on the chin, it’s always a good time to re-evaluate your stance on a particular holding.

I’m still bullish on commodities and this sector, but part of being a successful investor is being able to preserve your gains and/or cut your losses in the shorter term.Even if you still like a position over the longer term, there’s nothing wrong with re-entering the position under better conditions—if you still believe in that particular play or you like the story but want another way to play it.

In the case of the oil services companies, the good have been thrown out with the ugly.

Many of them, which don’t have significant drilling activity in the Gulf, have been smashed badly over the last two weeks following the BP/Transocean (NYSE: RIG) explosion and subsequent oil spill.

Some of these companies that drill outside of the United States have been hit pretty hard in sympathy with their US peers and deserve a close look as they touch 52-week lows.

This makes the current environment a buying opportunity for those companies focused outside the blackballed Gulf of Mexico.

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