Winning Oil Services Stocks (ETF-OIH)

oildrumLet’s be honest, as drivers and consumers, we hate hearing news that the price of oil is rising. Higher crude prices mean high gas prices and a little more of a pinch every time we head to the local gas station. Fortunately, there is a way to ease the sting of higher gas prices and even profit from them. Oil services stocks are deeply tied to the price of oil when it comes to stock performance, and since the price of oil is on the rise, now may be the time to take a look at this sector.

And don’t worry if you don’t want to individually own all of the names mentioned in the following article, because there’s an ETF for you. The Oil Services HOLDRs ETF (AMEX: OIH) holds all of the names we’re going to highlight, and many more. Its chart since the beginning of March is a thing of beauty, as the S&P 500 is up 30% since March 2, and the OIH is up over 60%.

Let’s take a walk in the oil patch to see how we can profit from the rise in crude prices.

  Three month performance Trailing P/E
Diamond Offshore (NYSE: DO)  45% 8.56
Schlumberger (NYSE: SLB)  60% 13.82
Transocean (NYSE: RIG) 45% 12.45

Data as of May 29, 2009.

RIG-ing Some Profits
Transocean is the largest holding in the OIH at about 17%, but you could do a lot worse than to own this stock directly. Punished when crude prices slid through the second half of 2008, Transocean shares have rebounded sharply in the past several months. Some investors may think that a 60% move in three months means there’s not much left to come, but keep in mind Transocean flirted with $145 a share exactly a year ago.

Of course there are no guarantees that Transocean will reach those lofty levels again, but what is known is that this operator of offshore rigs (the world’s largest) has almost $4.40 in cash per share. Transocean is also making a play on Brazil. The last two noteworthy discoveries of new oil have come off the coast of Brazil, and if they prove legitimate in the coming years, rig count will surge and Transocean is well-positioned to take advantage of this opportunity. Only 11 of Transocean’s 136 rigs currently operate off the coast of Brazil.

It’s difficult to quantify where crude needs to go in order to take Transocean shares over $100, but the reality is this is easily a $100 stock, which means investors can still make more than 25% based on Friday’s close. The average price estimate of the 32 analysts covering Transocean is around $97 and if crude oil sniffs $75 this summer, Transocean shareholders will be a happy bunch.

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