Halliburton "Misplaces" Radioactive Rod

Energy services major Halliburton (NYSE: HAL) disclosed this week that it had lost track of a seven-inch radioactive rod used in its energy machinations in the gold-rush-like booming Permian Basin in West Texas. Bloomberg noted that the slip occurred "somewhere in a 130-mile swath of the state’s western oil fields." Having already checked the route a few times, the parties are looking for help, and the state has asked the Austin-based National Guard unit for assistance.

The rod in question is a seven-inch stainless-steel one-inch diameter cylinder "marked with a radiation-warning symbol" (holy duck and cover, for those from the home bomb shelter days), and -- I kid you not – "do not handle."

Find a cylinder in a creosote stack
Let’s talk "swath" and odds of finding the cylinder. I live in West Texas. I know West Texas. This swath is very easy to get lost in, whether you're a stainless-steel rod or a person.  On this stretch between Pecos ("paykus" locally) and Odessa, there might be one tree most of the way between towns and, if there is, a herd of cows shades itself there. The cows pretty much tear the flora to pieces, leaving only thorny mesquite and ubiquitous creosote bush. The former grows five feet, at most, and the latter, less.  This makes it very hard to see anything against the mixed colored sand and rock.

The rod’s relatively low potential harm allows poking fun. Apparently, you're safe if 20 feet to 25 feet from it. But Catch-22: Can you see the symbol and "do not handle" from 20 feet to 25 feet? Fortunately, the Texas Department of State Health Services reports that it can cause harm only if held or touched for a few days. So take a look --but get away. It's sort of like when you encounter a rattler out here. (I put this stuff in because it’s true, but also to make look Texas manly.)

And how might it find itself in the vast camouflage? It probably bounced off a truck and the dirt road into the sidelines. And dirt roads they are, with the energy services, drilling, and production action kicking up dust far from any paved road --off which, by the way, metal would bounce even more.    

The one possibility -- and an advantage out here -- is the endless sunshine. Metal might shine. So there’s a chance.

The gold rush in the oil patch
There could be a silver lining to this stainless-steel mishap. The news coverage may focus a larger investor audience on the massive Permian Basin energy boom here, described as on the scale of the Bakken in eastern North Dakota. Fallow for years after Bush Senior made his fortune, new hydraulic fracturing has given the Permian a new life in oil, wet gas, and dry gas. Boomerino, baby!

I compulsively chat up people wherever I can get investing scuttlebutt. In a recent Odessa visit, I learned that one-bedroom apartments there go for $2,500 -- if you can find them. People with any skills flock here from everywhere for triple their salaries. Fast-food joint strips overwhelm with digital signs (keep your eyes on the road, people!) advertising desperately for help, paying bonuses and health care and limousine service home to work (not the last one).

And where there's money, there are companies
With this prosperity in a region where hydraulic fracturing for oil and gas has only just begun, carpenters are flocking from everywhere, petrochemicals in the air, so, too, the monetary joy passes to some of the nation’s leading energy services companies. This is why Halliburton -- and everyone else -- is there.

Funny how low a profile they keep. Other than a very unobtrusive office on, say, business route I-20 in Midland-Odessa, each company doesn’t even seem to label all its trucks. On monthly business trips through the area on county roads, it’s one dirt-road turn off indistinguishable from another. Until you pass, and in a flash, there are little white signs with pointed wood stakes, arrows, and "Patterson-UTI #245," or "Nabors #52." Some are overwhelmed with the signs. It hits you. Somewhere down that road is Big Money.

The big players in the Basin and nationally are:

*August 13, 2012 close
**Even with some years of French, I always thought Schlumberger was pronounced like hamburger. With a special sauce. "F" in French.

Source: S&P CapitalIQ

According to this quick look, Patterson-UTI and Halliburton are cheapest, and both have debt well in hand. Schlumberger and National-Oilwell Varco are most expensive, with the latter sporting the lower debt to equity. Nabors splits the ticket and has the highest debt to equity. So?

The debt level for National-Oilwell Varco has some real benefits. Motley Fool Special Ops senior analyst Michael Olsen, CFA, tells me:

Provided a company can service the debt and it doesn't result in a lower credit rating (or the risk of distress), a higher debt to equity lowers the cost of capital, the 80% option. But all else equal, lower debt to equity is better. Lower debt, and a lower debt/equity, means a company is in a better position to determine its destiny, because it doesn't have to refi, pay back, or service debt

.And National-Oilwell Varco’s low debt to-equity looks even better when I ask Stock Advisor Associate Advisor Alex Scherer, CFA. He offers this about the Stock Advisor pick:

“NOV” is referred to as “No Other Vendor” in the oil patch, because they are the 800-pound gorilla of the oilfield equipment business.  They have a majority market share of all new rigs built, and we have a massively old and outdated rig fleet worldwide that's in the midst of a multi-decade new construction phase.  NOV also has a very talented management team that specializes in M&A and buying small competitors cheaply during downcyles, because they are so large and diversified that they have tremendous cash flow from one part or another of their business all the time, and so can invest strategically even when others are short on cash.

Best picks
It’s wrong to extrapolate recent success with the future, but all signs point to a U.S. energy industry that will be able to move nimbly among oil, wet gas, and dry gas, depending on where they find the best return for many years, always allowing for an uncertain future. And all the producers will need the servicers.

So you have two choices. One is to buy the cheapest, Patterson-UTI or Halliburton, and wait for the EV/EBITDA and EV/EBIT multiples to revert to a higher mean. Second is to pay up for National-Oilwell Varco, the company that has the best debt/equity ratio to determine its destiny (Olsen) when the opportunities to add value occur (Scherer).

Or why decide? You can do both. Average in and wait a few years for the profits that are odds-on to come. Be sure to add these companies to your Watchlist