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[LTCM]

* May 24, 2010, 2:23 PM ET


It seems like the pain will never end for the oil drillers. Every day there are new reports of the oil slick hitting shore, dead fish washing up on the beaches and the pain that’s being inflicted on the coastal economy. Since the explosion that started the oil spill on April 20 the drilling stocks have been destroyed, much more than the average index, which has also been going straight down.

Transocean (RIG), down 31%
Diamond Offshore (DO), down 17%
Hercules (HERO), down 35%
Noble (NE), down 25%
Ensco (ESV), down 23%
Rowan (RDC), down 25%
Pride (PDE), down 22%

None of them have been spared.

Both a long-term perspective and short-term perspective suggests that the selling has been overdone and the drillers, even RIG (whose offshore rig is the one that exploded) are worth taking a look now.

There are two issues:
a.) delays or complete bans in offshore drilling in the Gulf of Mexico for the time being
b.) Any potential penalties, lawsuits, resulting from the explosion

In terms of “b” above, its quite possible that cementing at the Deepwater Horizon offshore rig was the culprit of the explosion. While it was Transocean’s rig it was Halliburton operating under BP supervision that could end up with the bulk of the blame. RIG, trading at just 6.5 times next year’s earnings could see a massive snapback once the dust clears. Even with temporary bans on drilling their backlog is immense and the earnings potential won’t slow down forever.

Diamond Offshore, which hasn’t sold off as much of the rest, is also cheap at just 8 times next year’s earnings. ESV, also at 7 times next year’s earnings and now trading at $38, was just reiterated a “Buy” by DB who put a $65 price target on the stock. The analyst thinks that shareholders are unfairly punishing ESV for the spill, which it had nothing to do with.

Let’s not forget the primary reason these rigs are all offshore and why the economies of the world are taking this environmental risk: the world is running out of easy to find oil. We demand about 85mm barrels a day. And the world currently supplies about 85mm barrels a day. The cheap, easy to find oil we used to have in the U.S. 50 years ago no longer exists anywhere in the world except for maybe (and thats a big, unknown “maybe”) Saudi Arabia. Offshore drilling, while it may take a temporary break in order for the government and the companies involved to research the cause of this spill, its only a temporary break. Even President Obama was starting to relax a little on offshore drilling before this oil spill put the environmental risk into the headlines. Why was he interested in doing that? Not because its suddenly a pro-environment thing to do but because he really does see the need to find oil in as many places as possible to reduce our reliance on Middle Eastern oil.

It is this reliance, plus the long-term supply and demand picture (which sits under the Peak Oil umbrella) that creates the long-term investment picture for the drillers mentioned above. While its scary to buy a falling knife, my guess is the basket of these stocks will come back hard and furious.

James Altucher is a managing partner of Formula Capital, an alternative asset management firm, and an author on investment strategies. Unlike Dow Jones reporters, he may have positions in the stocks he writes about.