The recent market weakness has created a lot of opportunities for long-term investors. One such prospect exists in the energy sector. As the United States searches for domestic sources of fuel, natural gas continues to grow in popularity. According to the International Energy Agency, global consumption of natural gas will rise by more than 50% over the next 25 years. With an abundant supply via shale formations, the United States will be a major contributor to that supply. With this long-term, bullish prognosis in hand, investors may want to consider domestic land drillers. A variety of factors make the sector an interesting buy, and stock prices for the sector are dirt cheap.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Rig Counts Are Up
As natural gas and oil demand continues to increase, the land drillers will ultimately be charged with extracting that energy from the ground. This is the group that does the 'heavy lifting,' physically removing the fuel from the earth, and as of late, it has be doing more of it. Since 1944, oil service firm Baker Hughes (NYSE:BHI) has issued a weekly report detailing all varieties of drilling activity. Its current report shows very bullish increases in the number of drilling rigs in operation. Rigs engaged in exploration and production throughout the United States totaled 1,991 for the week ending September 23. This is an increase of six from the previous week's rig count, and represents the second increase in two weeks. The current nationwide rig count is more than double that of the six-year low of 876 reached in June of 2009, but still has room before it reaches its historical high of 2,031 in 2008. Canada has seen its rig count increase by 107 over the last year.

Innovative technologies, like horizontal drilling and multi-stage fracturing, have changed the dynamics of drilling for oil and gas onshore in the United States. These techniques are vital to the land drillers' continued success. In 2003, horizontal style drilling had roughly a 30% market share. Today, that number sits well above 60%. The total number of horizontal rigs, currently in action, rose by four to sit at 1,382 total rigs. According to analysts at UBS, these modern directional drilling fleets will result in higher day rates, increased margins and see a greater demand from exploration and production (E&P) firms due to better technology. The land drillers have been able to lock in higher yielding, longer term contracts that will smooth out returns for investors.

A Drilling Portfolio
For investors wanting to take advantage of the long-term growth in domestic oil and natural gas production, have a few choices. The broad based SPDR S&P Oil & Gas Equipment & Services (NYSE:XES) has about 28% of its holdings in drilling firms, and could be used as proxy for the entire oil services sector. However, for those who want to target their exposure to drilling growth, individual stocks are the way to go. Here are few picks.

With nearly 350 drilling rigs, Patterson-UTI Energy (NASDAQ:PTEN) is one of the largest drillers in the country. However, the real growth for the firm comes from its proprietary advanced 'Apex' rigs. PTEN's design makes the rigs drill quicker and more efficiently than conventional rigs. These rigs are better suited for the new E&P landscape of shale drilling. PTEN's advanced rigs were able to see day rates in the neighborhood of $21,000 in the most recent quarter. Although, not purely land drillers, both Helmerich & Payne (NYSE:HP) and Nabors Industries (NYSE:NBR) offer compelling buys as well.

Chesapeake Energy's (NYSE:CHK) recent purchase of Bronco Drilling and Precision Drilling's (NYSE:PDS) purchase of Grey Wolf, highlights that smaller may be better. Small-cap Union Drilling (NASDAQ:UDRL) could be the crown jewel in an acquisition with many of its rigs in long-term contracts in the Marcellus shale. Investors may want to consider Parker Drilling (NYSE:PKD) as well.

The Bottom Line
As both natural gas and oil drilling activity continues to increase onshore, the land drillers will benefit. The market's recent rout offers an opportunity to purchase shares in these firms. The previous stocks along with Pioneer Drilling (NYSE:PDC) make ideal selections. (For additional reading, take a look at A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Tickers in this Article: BHI, XES, PTEN, HP, NBR, CHK, PDS, UDRL, PKD, PDC

comments powered by Disqus

Trading Center