When it comes to many other industries, having a brand name can provide a lot of competitive advantages that will attract investors. In the energy industry, though, that isn't necessarily the case. Some of the better investment ideas in this industry are some of the lesser-known companies because they aren't the consumer-facing companies that so many people recognize.
So we asked three of our contributors to each highlight a flying-under-the-radar company they see as a great investment today. Here's what they had to say.
Excellent bloodlines and a great location
Matt DiLallo: Permian Basin-driller Parsley Energy (NYSE:PE) isn't well known by most investors just yet. That gives investors who are looking where others are not the opportunity to buy an up-and-coming oil company before the rest of the market realizes its potential.
One thing that sets the company apart is its founder, Bryan Sheffield, who is a third-generation oilman and son of Pioneer Natural Resources' (NYSE:PXD) CEO Scott Sheffield. That's noteworthy because Scott built Pioneer into one of the premier drillers in the Permian Basin. Given his father's success, Brian has wisely chosen to follow in his father's footsteps as he builds a premier oil company in America's best oil basin.
Like Pioneer, Parsley Energy's game plan is to acquire as much prime drilling land as it can in the basin to set it up for robust growth in the years ahead. Furthermore, the company is following Pioneer's plan of issuing equity to fund acquisitions and capex instead of debt, which weighed down most of their rivals in recent years. As a result, Parsley has maintained a low leverage rate throughout the downturn, which enabled it to deliver remarkable growth at a time when many producers are in decline.
In fact, despite the worst oil market in decades, Parsley Energy has been able to grow its production by a stunning 68% over the past year. This is not growth for the sake of growth, evidenced by the fact that its wells are generating a 60% to 90% rate of return due to relatively low drilling costs and excellent production rates.
With an enterprise value of $7 billion, Parsley Energy is a fraction of the size of most oil companies, causing it to remain under the radar of most investors. However, it might not stay there for long because it has a game plan to not only grow its size but earn exceptional returns along the way.
Helping to produce better and earning high returns in the process
Tyler Crowe: People in the oil and gas industry may recognize the name Core Laboratories (NYSE:CLB), but it's not exactly a name that many outside the business will recognize. Core's business is analyzing data from prospective and developed oil and gas reservoirs to better determine how to make that well or reservoir more productive and economical. The fact that the company provides a service that improves profitability for producers means that it has a little bit more pricing power than some other oil services companies that provide more commoditized services.
What makes Core a compelling investment is that management uses the advantage of providing a specialty service that commands a higher price and turns it into extremely high returns for investors. Even today in what is considered an extremely challenging market for oil and gas companies, Core Labs is still able to convert 23% of its revenue to free cash flow and generate returns on capital invested greater than 20%.
This may be a bit of a rough patch for Core and the rest of the industry, but the company has shown that it can continue to produce results on a much smaller revenue base. As drilling activity returns to normal, more and more producers will employ the services of Core to either help better categorize their projects under development or increase production at existing wells. When this does happen, investors will likely reap large rewards.
Keep watching this small, high-spec offshore driller
Jason Hall: Atwood Oceanics, Inc. (NYSE:ATW) certainly isn't a stock I'd suggest buying today, but it's absolutely worth putting on your watch list. Like many of its offshore drilling peers, Atwood has seen a huge number of its drilling vessels come off contract with no new work available, and there's not much indication that the market is ready to start spending on offshore just yet. But when it does, this little-known offshore driller could be a huge winner.
Atwood's backlog of contracted work is concerning, and this is what to me keeps it from being a stock to buy today. With only a few vessels actively working, the company could struggle to generate the cash flows it needs to support its existing operating expenses while the market plays out, especially if there are any problems with any of its existing contracts.
On the other hand, Atwood's debt situation is much better than that of some of its peers. The company has around $1.4 billion in long-term debt, with no maturities in the next couple of years, while some of its competitors are facing billion-dollar maturities soon -- maybe at the bottom of the downturn. This gives Atwood a lot more breathing room to ride out the downturn.
And once the freeze on offshore investment starts to thaw, Atwood is one of the first stocks I'd like to own. We aren't there yet, so Atwood is on my watch list until the winds change.
Jason Hall owns shares of Core Laboratories. Matt DiLallo owns shares of Core Laboratories. Tyler Crowe owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Atwood Oceanics and Core Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.