I have been a fossil fuel energy bull for several years, and I expect to continue to be one for a long time. As a result of what should be robust drilling activity and a continued expansion of offshore drilling around the world, shares of Oil States International (OIS) appear to be undervalued at the recent price, argues Tim Melvin, editor of The 20% Letter.

OIS provides equipment used to drill for oil onshore and offshore. A little over half of the business is supplying equipment to the offshore oil and gas industry, with the remaining business being focused on well services and downhole technology offerings. Oil States International currently holds over 177 patents on oil services technologies and has more than 30 patents pending.

OIS is a major player in drilling services in the continental United States as well as the Gulf of Mexico. The current environment for oil and gas drilling projects is strong. As long as this remains the case, the demand for the products and services Oil States International provides will grow.

The company is also taking steps towards being a player in the energy transition process. Its services can be used in offshore wind generation and subsea mining of rare earth metals.

The global population will continue increasing, and this will drive increased energy demand. As much as I like renewable energy, we are decades away from reaching a point where it will be the dominant global energy source.

Markets have been overlooking smaller oil services companies, and this company is no exception. The shares were recently trading at less than tangible book value and less than $0.60 on the dollar of sales. Although few analysts cover the company, those that do expect to see earnings more than double in 2024.

It is worth noting that Oil States International has posted a positive earnings surprise in the last four quarters, so analysts are underestimating the company. The balance sheet is solid, they have plenty of cash, and cash flows should increase again in 2024.

I see little risk of any serious financial difficulties for this company, no matter what happens to oil prices in the short term. The fair value of the stock is somewhere around $12.50 a share.

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