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Small-Cap Oil Stocks The One Small-Cap That Can Tell Shell Oil What to Do
To set the stage, let’s think about how a drilling rig, whether onshore or offshore, is similar to an electricity-generating windmill farm. Both kinds of structures tend to reside in environmentally harsh and inaccessible locales. Therefore, both kinds of structures must possess the durability to resist the elements — from saltwater to blazing sun to extreme temperature to hurricane-force winds to rogue waves. Drilling rigs and windmills must both support rotating machinery for many hours per day, amidst many different kinds of conditions. And, if the critical machinery does not rotate, then both drilling rigs and windmills are worse than junk. They are junk that is costing the owner or operator a lot of money. Day rates for the big, offshore drilling rigs can be as high as $500,000…or even more for the real behemoths. Do the math on that. Figure that the rig lessee is paying more than $20,000 per hour, whether the rig is running or not. So if you are an operator that has a very costly drilling rig under agreement, downtime is immensely expensive. You will simply not accept downtime that is caused by mechanical failure, no matter what the explanation. Your instruction to the rig manager is, “Don’t let anything break.” Another way of saying it is, “Use the very best equipment. Pay whatever it costs.” And now let’s consider a windmill, perched, often as not, atop a 250-foot tower that is constructed on some remote mountaintop or in some distant prairie, far from the nearest machine shop. Its massive blades may be spinning thousands of revolutions per hour, 18 or 20 or more hours per day, every day of every week, every week of every year, generating megawatts of electricity that are flowing into the power grid. But consider the rigors of that environment. The wind may gust from a very low speed to powerful blasts within a matter of seconds, and then the wind may die down, and soon thereafter repeat the process all over again. So the mechanical workings of the windmill have to absorb and transmit immense stresses, with the rotating machinery gearing up and gearing down, again and again, over the very long haul. But, the windmill is almost never attended by a human maintenance worker. So the windmill system must be designed and built to tolerate the rigors of a high-wind environment. And the customers for that electricity, the electric utilities, are under legal mandate from numerous regulatory bodies to keep their electric grid powered up. So again, the instruction to the windmill operator is, “We need consistent levels of power from your windmill farm, so don't let anything break.” And not uncommonly, someone is also saying, “Use the very best equipment. Pay whatever it costs.” Now, let me introduce you to a company that makes that “very best equipment” for these extreme kinds of applications. This company manufactures products for which people are more than willing to pay “whatever it costs.” And that company is the aforementioned Kaydon Corp. of Ann Arbor, Michigan. Kaydon, incorporated in 1983, is a world leader in the design and manufacture of custom-engineered, critical-performance products, to include bearing systems and components, filters and filter housings, as well as custom rings, shaft seals, linear deceleration products, specialty retaining rings, specialty balls, fuel cleansing systems, gas-phase air filtration systems and replacement media, industrial presses and metal alloy products. And this product line is far more than what you might buy down at your local auto parts dealer. These products are used by high-end, mostly high-tech, customers in a wide range of critical machine-positioning applications, instrumentation systems, material handling devices, aerospace and defense systems, security applications, high-tolerance construction efforts, electronic and even medical applications. As for the wind energy industry, Kaydon generates less than 10% of its 2006 sales from this business segment. But the company’s sales to the wind energy industry are growing very rapidly. As the nearby chart illustrates, Kaydon expects to quadruple its sale to the wind energy industry over the next three years:
At the current quote of $49 a share, Kaydon’s stock is selling for less than 20 times estimated 2008 earnings. There are about 28.2 million shares outstanding, giving the company a market capitalization of about $1.38 billion. Last February, when I recommended the stock to the readers of my investment letter, Outstanding Investments, Kaydon was trading around $45. So it has had a nice rise over the past few months. But then again, the stock is rising for a lot of good reasons, and those reasons appear to be continuing into the future…especially in the wind energy industry. In remarks earlier this year, Kaydon’s President and Chief Executive Officer Brian Campbell referred to “the strength of Kaydon's proprietary product positions and disciplined strategic direction. We believe our strong order intake during the year, combined with increased current incoming order rates and customer product availability inquiries, lay the foundation for increased operating performance in the current year.” *********Under 185 Spots Left********* A $10,000 Investment in this “Orphan” Stock Would Have Grown to $378,500 In late 2003, it cost investors only a little more than a buck to buy shares of NutriSystem Inc. (NTRI: NASDAQ) — a company based in Pennsylvania that sells prepackaged meal plans to people trying to lose weight. Investors who plunked down just $1,000 for NutriSystem stock back then — before it made the jump to the AMEX — could have grown this initial investment to $37,850 after only three years. There’s only one place to find these types of “orphan” stocks… Check it out here… ******************************************* One of Kaydon’s strengths going forward is, as mentioned above, its sales into the wind turbine market, particularly the critical bearings components of windmills. This is because the windmill sector of the market is growing at near breakneck speed, and the company is expanding its capacity and sales efforts in this line of business. In 2006, investment in windmill systems in the U.S. was second only to investment in new coal-fired power plants for the production of electricity. So Kaydon is positioning itself into the sweet spot of a fast-growing market. The key problem in developing windmill systems at the present time is the availability of windmill turbines, and this puts the investment spotlight squarely on one of Kaydon’s most profitable new business lines going forward. “We would love to build more wind farms,” says John Hofmeister, president of Shell Oil Company. “We have the real estate and the permits. We certainly have the funds to construct these facilities. But our biggest problem is just the availability of windmills. We are experiencing a two- to three-year delay in delivery of windmill systems.” Two- to three-year delays? And this from a large, well-capitalized company like Shell that can pretty much buy what it wants? Sounds to me like a growth story for a precision-maker of a critical product — the kind about which people say things like, “Use the very best equipment. Pay whatever it costs.” Until we meet again… P.S.: While on the subject of energy, there is one impeding event fast approaching. It will inevitably destroy many people’s portfolios. The Full-on Oil War of 2008 is going to push oil past $150 a barrel and gas over $6 a gallon. But there is only one way to protect yourself from this unavoidable event. I put it together in a special report called “Petrocalypse Now: Three Steps to Protect Yourself and Profit From Inevitable Oil Shocks.” Get yours before it’s too late… |
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| Byron King practiced law for many years in Pittsburgh, Pennsylvania, where his efforts were focused on litigation, bankruptcy and other oft-contentious matters involving people and money. Byron seldom writes a letter to the editor of any newspaper, because “some newsroom intern might screw up and print it.” But in a moment of weakness Byron once sent a note to Bill Bonner, publisher of the Daily Reckoning. Things happened. Fate intervened. Byron is now a co-editor of Outstanding Investments. |
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