Oil Drilling Investments in 2014 have not performed very well. But does that mean you should pass up on oil drilling investments? Or is 2014 the time to look for value in oil drilling investments before the explode in price?
In this short article we’ll take a look at some of the risks and tailwinds facing the oil drilling investment thesis this year. And then I’ll share some of the most popular oil drilling investments in 2014. Sound good? But before sharing my best oil drilling investment ideas and stock picks let’s look at some of the risks associated with investing in oil drillers.
Risks to Oil Drilling Investment in 2014:
Oil drilling investments have lagged in 2014. Despite being relatively cheaply valued there are still some risks that explain why some of the biggest oil drilling investments are trading below book value. So what are they?
One of the biggest risks facing oil drilling investors in 2014 is that there is oversupply of rigs coming into the oil drilling market. This excess of supply means that oil drilling companies are facing pricing pressures. This oversupply is especially risky for oil drilling companies with older rigs, as major oil companies may focus on companies with newer equipment. A reduction in cap-ex by major integrated oil and gas companies could further exacerbate the extra supply.
Beyond the oil drilling market, the rest of the energy mix may present a headwind to deep water oil drillers. While this risk is a little more speculative it’s hard to ignore the momentum of renewable energy and the natural gas boom. While it’s hard to quantify the immediate impact these emerging energy sources will have, it’s important for oil drilling investors to remember that alternatives to black gold are always being pursued.
Finally, even if all of the macroeconomic risks aren’t materially important, oil drilling investments are not without an intrinsic risk. That’s because oil drilling is a dangerous activity to begin with. Oil investors need to assume some risk based on the possibility of spills or other accidents that could lead to lawsuits. Focus on companies with strong safety records and commitment to effective operating procedures.
But I don’t want to paint too negative of a picture. Oil drilling investments also have a lot of potential upside in 2014…
Benefits to Oil Drilling Investments in 2014:
Despite the risks associated with oil drilling in 2014, the benefits to oil drilling investors are also hard to ignore. Most oil drilling companies have strong histories of operating profits. And these track records are likely to continue out into the future.
For one thing, it’s unlikely that new oil drilling companies will enter the space. There are a couple of big and established players. And given the complex and harsh environment oil drilling companies operate in, there is a significant barrier to entry. This provides a little bit of a competitive moat for those oil drilling investments that have already strongly established operations. In fact, despite the oversupply of rigs coming online, a number of the oil drillers already have significant backlog of revenue booked for 2014.
With that in mind, long term oriented investors may want to start fishing for value in the oil drilling investment opportunities. If you are looking for a long term place to park capital oil drillers might make sense. Plus, a lot of the oil drilling investment opportunities in 2014 pay strong dividends, so investors will accrue the benefit of getting paid to wait. So what oil drilling investments should we be looking at in 2014?
Oil Drilling Investment Examples in 2014:
There are plenty of different ways to find oil drilling investments in 2014. A great place to start is by reviewing the oil and gas drilling and exploration industry. That way you can find oil drilling investment examples that meet your personal criteria (whether that’s a big dividend, a margin of safety, or something entirely different).
One popular oil drilling investment in 2014 is Transocean Limited. You can read my previous RIG analysis here to see why this major oil driller has attracted the interest of activist investor Carl Icahn. Unfortunately, I think RIG faces some headwinds in the form of an older fleet of rigs, and there are some better oil drilling investments for 2014.
For example, SeaDrill Limited and Ensoco are oil drilling companies that have newer fleets and a backlog of orders in 2014, making them relatively attractive oil drilling investments. To be fair, the stock price of both companies appears to be in a bit of a downtrend. But these might be examples of relatively safe oil and drilling investments for longer-term oriented investors.
For full disclosure I am long a small amount of ESV at the time of writing. I like the company because it pays nearly 6% in dividend and is trading just below intrinsic value. The company also has a strong track record of delivering shareholder value. What oil drilling investments are you contemplating in 2014?
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