Lately drilling stocks have taken it on the chin.
But some drillers see their business as an oversold situation on wall street.
That's why Haliburton spun off KBR, and they still got punished in the price.
Another driller to look at is Hercules where the management is so confident that drilling stocks are a bargain that they’ve decided to take on a “Hercules”-sized risk. Management is heavily diluting existing shareholders and stretching its balance sheet in order to finance the deal. Hercules has only 32 million shares outstanding, yet it’s offering 57 million of it shares and $930 million in cash (via new debt) to acquire Todco, a company more than twice its size in terms of market value.

This deal is the last thing Hercules management would do if they were expecting a return to the 1990s’ drilling depression. They are essentially risking their jobs and a lot of their net worth that the drilling environment in the Gulf will remain somewhat robust. Hercules owns 64 lift boats and nine jackup rigs, so drilling is only a small part of its existing business, which mostly involves supporting drilling operations.

Todco is a second-tier driller and has been priced in the market as such. Its rig fleet is old and fairly obsolete. Yet its stock was so cheap that the entire company arguably traded for a discount to the liquidation value of its fleet.
This leads to who is the best in the business with the newest and best technology on rigs.

Ensco is the best, odds are good that another good buying opportunity will arrive in the coming months. The overall market has been in a jittery mood since late February, so the slightest increase in fear can result in the swift punishment of all stocks. Fears of a recession will impact all stocks, no matter how compelling the three-five year investment case.

This case is as strong as ever for Ensco. For example, in its latest fleet update report, Apache renewed its lease on Ensco 106, a vital part of its Australian exploration campaign. Apache is renowned for making shrewd, high-return-on-capital decisions. So it says a lot that the new contract is benchmarked at $265,000 per day through March 2008, up from the $185,000 per day that Apache was paying to use the same rig over the past 12 months. It had to pay up or risk losing Ensco 106 in a very tight international drilling market.

Ensco has been rumored to be a buyout target along with most other drillers. Today, Reuters reports on Norwegian shipping tycoon John Fredriksen’s plans to quickly expanding the size of his company, Seadrill, via acquisitions. “Last week, investment bank Lehman Brothers said Seadrill was in ongoing deal talks with U.S. drillers GlobalSantaFe Corp., Ensco International Inc., Noble Corp. and Transocean Inc. In a note to clients, Lehman said Seadrill, which operates mobile drilling fleets specializing in deep-water and harsh environments, is willing to pay cash and will pay a premium, but is not interested in a hostile deal.”

Maybe Seadrill has already approached Ensco with an offer and received a reply of “No thanks.” I wouldn’t be surprised. An enormous premium would be required if a friendly takeover bid is to be accepted by Ensco’s board. Otherwise, shareholders would be better off just continuing to allow management to run their company in a very profitable environment.

So as I look out now for good investments keep this one on your radar screen and get your powder dry for the year end tax season where people will be strapped for cash and won't buy stocks for awhile.
This will continue to pressure on the market along with the lower dollar and the slump in the economy.