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Trade Idea: NorAm Drilling


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New buy: NorAm Drilling (OSE:NORAM)

The company operates 11 high-spec horizontal drill rigs operating in the Permian basin, is debt-free, yields fat dividends, and has a low PE. The company reports earnings today after the close.

Note how the price is holding above the 50 (red) and 100 (blue) DMA.

For some reason, IBKR doesn't allow trading in this instrument, so I had to buy it on Saxo. Took a starter position at NOK 40.4.

May 22 Update

NorAm Drilling is also listed in Frankfurt under the ticker TM9. It is highly illiquid though. With stocks like this, the exit strategy is a takeover. Or a US listing that adds liquidity. I'm bullish on the Permian and I've sized my position so I don't mind being stuck without an exit until this plays out. With small caps, you need to get paid for taking liquidity risk in order for the trade to be worth it.

The company reported results yesterday. Q1 revenue was $25M, which works out to $100M annualized. But if utilization goes up to 100%, even at constant day rates, the company will generate ~$115M in revenue. At a higher utilization, say net income margin moves up to 20% (2023 NI margin: 16%). That gives the stock a forward PE of 7.1x. A 2% increase in day rates - which goes straight to the bottom line - changes the PE to 6.5x. A 5% increases lowers the PE to 5.7x. This stock is cheap, likely only because of the illiquid listings in Norway and EU.

Good Trading!


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