The Rude Awakening
Wall Street, New York
Wednesday, July 12, 2006 ------------------------- - What on earth do "Nodding Donkeys" have to do with
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Nodding Donkeys
By Eric J. Fry Oil stocks dip and oil stocks rise...just like "nodding
donkeys" in a Texas oil field. Unfortunately for investors,
oil stocks do not bob up and down as rhythmically and
predictably as an oil well pump. Instead, these stocks rise
and fall according to the unpredictable whims of investor
sentiment. The resulting volatility rarely produces smiles,
but it does produce opportunity. For those of us who trust in the long-term energy bull
market, every bout of weakness creates the opportunity to
increase or adjust our investments in energy stocks. Since
the bull market in crude oil will likely continue for a
while longer, oil stocks will likely do a lot more rising
than falling over the next few years. Therefore, the next time oil stocks dip for a bit, our
colleague, Dan Amoss, suggests picking up a few shares of
Grant Prideco (NYSE: GRP), the world's leading manufacturer
of drill pipe. Amoss, who is the editor of Strategic
Investments, is a "big picture" thinker who has been
advocating a big commitment to selected energy and natural
resource stocks. Dan is particularly fond of Grant
Prideco., the world's largest manufacturer and supplier of
oilfield drill pipe and other drill stem products. The thesis supporting an investment in GRP is relatively
straightforward: high oil prices inspire an increasing
amount of exploration and development activity, which
requires an increasing number of drill rigs...and an
increasing amount of rig hardware. Not surprisingly,
therefore, Grant's fortunes correlate very closely with the
price of oil, and even more closely with the number of
drill rigs in operation. 
"Drill pipe manufacturing will be a very good business over
the next few years," Dan predicts. "In order to offset
production declines from the most prolific oil wells in the
Middle East and elsewhere, the number of global drilling
sites must be greatly increased. Not only will the number
of rigs have to increase, but their capability must as
well." The nearby charts tell the tale. The U.S. and international
rig counts are both soaring, which is a big part of the
reason why Grant has been booking record profits. The
company's revenues jumped 42% last quarter, thanks to an
18% jump in worldwide drilling activity, year-over-year. 
Grant, which earned $1.74 in the year ending in December
2005, is on track to double its profits by the end of 2007.
In other words, at the current quote of $45 a share, the
stock sells for about 13 times estimated 2007 earnings. "I normally do not place much weight on future earnings
estimates," the cautious Amoss admits, "but due to the
company's large order backlog and great operating
environment, earnings should grow very rapidly. Grant's
order backlog has been growing every quarter, as the
worldwide rig count has exploded upward. Its record $1
billion backlog as of March 2006 is up from $400 million in
March 2005. This backlog greatly enhances earnings
visibility. Furthermore, Grant Prideco's business has
tremendous operating leverage, so future earnings and cash
flow should grow much faster than sales in percentage
terms." Admittedly, the entire oil services industry has been
riding high, but Amoss expects Grant to ride higher still.
It is a worldwide leader that has been steadily expanding
its market share...in an industry that is also expanding. "Grant Prideco," the company's Web site boasts, is a global
leader in drill bit technology and manufacturing, and a
leading provider of high-performance engineered connections
and premium tubular products. The company has 25
manufacturing facilities and more than one hundred sales,
service and repair facilities strategically located in all
major oil and gas regions around the world. Amoss considers the stock a "buy" up to $48 and thinks it
could climb as high $60 within a year, even if oil prices
tread water. "The company's leading technological position in drill pipe
and drill bits will continue to serve shareholders well,"
Amoss predicts. "The company's drill bit segment has been
gaining market share, and should continue to do so, as the
U.S. oil and gas industry continues rebounding from the oil
bust of the 80s and 90s. Twenty years of underinvestment in
the drilling industry will result in an extended boom for
drilling equipment companies. Business is booming already
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