I’m Building a Bigger Position in This Fast-Growing Energy Play
One of the favorite names on my shopping list, this is a way to own the fastest-growing oil and gas fields in the world.
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All the major indexes have gains Tuesday morning with the Nasdaq 100 (QQQ) leading the charge. The strength is primarily due to semiconductors (SMH) and the Magnificent Seven.
Despite this action, breadth is running negative with around 47% of stocks in positive territory and there are more new 12-month lows than highs. Oil is down about 3% and bonds are rallying, which is providing some excuses for the bulls to buy.
The action is primarily positioning in front of Nvidia’s (NVDA) earnings on Wednesday and then Fed Chair Warsh at Jackson Hole on Friday.
I don’t trust the market to produce sustained upside at this point so I’m in no rush to add exposure. What I am doing is working on my shopping list. Yesterday, I highlighted Hinge Health (HNGE), which continues to develop very nicely.
Today I am highlighting a stock I’ve discussed previously and already own, but it had a great earnings report and I find the valuation compelling. I am looking to build my position further as opportunities arise.
National Energy Services Reunited
National Energy Services Reunited (NESR) is one of the largest oilfield service companies in the Middle East and North Africa. It does the field work that turns a reservoir into production. This includes drilling, hydraulic fracturing, completions, pumping, and water treatment, almost entirely for national oil companies such as Saudi Aramco and Kuwait Oil Company. For U.S. investors it is a way to own the fastest-growing oil and gas fields in the world through a Nasdaq listing while domestic drilling activity shrinks.
The second quarter was hard proof of the story. Revenue of $520.8 million grew 59% and beat consensus by roughly $75 million. Adjusted earnings per share of $0.44 beat the $0.34 estimate and more than doubled from a year earlier. Free cash flow came in near $100 million, net debt was cut roughly in half, and the company will pay its first dividend in the fourth quarter. Management called $2 billion of revenue a minimum for this year, and the growth is contracted rather than hoped for.
The centerpiece is a multi-billion-dollar fracturing award at Saudi Aramco’s Jafurah gas development, where a fifth fleet has already shipped and the next round of awards is expected in the second half. A $300 million package of Kuwait contracts was added this month, and management is targeting $3 billion in revenue faster than its original three-year plan.
Testing the Gap
Even after a big run, NESR’s valuation has not caught up to the growth. That is partly due to concerns about continued uncertainty in the Middle East because of Iran. However, the more disruption there is to regional supply, the more the national oil companies spend on building out production capacity, and that spending is what NESR sells into.
The stock trades around 14 times this year’s estimates and about 12 times next year’s, against earnings growth estimated near 50%. That is a PEG ratio deep below one in a group with no connection to artificial intelligence.
The stock gapped from $29 to $32 on the August 10 report and ran to nearly $37. It has now pulled back to the top of that gap and this is where I start building my position further.
My plan is to begin with partial buys in the $32 area if the level holds, and I am happy to add more on a deeper fill toward $29.50, where the rising 50-day moving average is waiting. A failure of that whole zone would tell me the market is taking back the quarter, and I would step aside and reassess. Until then, I will treat weakness into the gap as a chance to build the position rather than a reason to doubt the quarter.
At the time of publication, Rev Shark was long NESR.
