Parker Drilling (NYSE:PKD) is an oil rig supply company that has been exploiting the bull oil market since 2003. The company's net income rose more than 28% in 2007, and with inflation on the rise and oil prices hitting new highs almost daily, Parker Drilling is definitely in the right industry at the right time.
2007 Results and Overview
Parker drilling is involved in three sections of the oil industry: land and offshore contract drilling, oil rig project management, and the rental of a variety of necessary tools needed in oil exploration. Each one of Parker's three business segments increased its revenue during 2007, averaging a 12.9% rise all together. Overall, Parker had a very successful 2007, putting up several impressive numbers:
- Record EBITDA of $261.8 million, a 28% increase over the prior year.
- U.S. barge rig operations: Record EBITDA of $128.7 million, a 23% increase over 2006.
- Quail Tools segment: Record yearly EBITDA of $83.7 million, an 11% increase, and record quarterly EBITDA of $25 million.
- Fourth-quarter 2007 international land rig utilization of 83%, almost double the 46% level attained in Q4 last year.
A quick glance at these numbers, reveals Parker Drilling is growing quite well. Most of that growth is due to the boom in the oil industry, which isn't going anywhere but up for the next few years. We are in an inflationary upswing, which means commodity prices are on the rise.
Consumer prices and Producer prices are up 4.5% and 8.0% respectively since February 2007. The Federal Reserve is aggressively lowering interest rates and seems to be more concerned with the short term GDP numbers than inflationary pressure. But with consumer spending making up over 70% of GDP, one would think that inflation would be at the center of attention when it comes to increasing economic growth.
(To learn more, see The Importance Of Inflation And GDP.)
The Fundamentals
Not only is Parker Drilling growing at a nice and steady rate, but it is also extremely undervalued. Taking a look at some of the basic valuation metrics, the stock has a trailing P/E ratio of 6.5, compared to the Oil & Gas Drilling and Exploration industry's average of 18. Also consider the stock trades a bargain basement price to sales ratio of 1.1 compared to the industry average of 14.44, while its operating performance has produced an outstanding return on equity of 20.9% over the past year, compared to the industry average of -30.6%. (For more on each of these ratios, see the Investment Valuation Ratios Tutorial.)
The market has obviously been ignoring this up and comer, but with fundamentals like these, I just don't see how it is possible for this pessimism to continue. Parker stock currently trades around $7 per share. When all the ratios eventually come into line, this stock could be trading significantly higher.
The Bottom Line
The simple fact of the matter is that basic necessities are much more expensive now then they were just three years ago, and as a result there isn't much for the average investor to do except explore ways to profit. With inflation on the rise, commodities are bound to follow. Commodities and commodity-related companies are likely to be a great way to make some decent profit, and Parker Drilling is a great place to get started.
For related reading, check out Commodities: The Portfolio Hedge.
