The broader market averages continue to sell off and are now approaching levels unseen since the February/March lows. As I suggested in last week’s flash alert, the energy patch hasn’t been immune from the selling, nor will it be going forward.

It’s not a case of fundamentals in a market like this. Managers facing losses because of the recent market correction and the collapse in the credit markets are looking to raise cash. To raise that capital, they’re selling winners, and energy stocks have been big winners this year.

Make no mistake about it–oil can pull back to the low to mid-60s. That move can occur even though the last two inventory reports from the Energy Information Administration have been bullish, and there’s no real change in the fundamentals of weak supply growth and strong demand. During selloffs of this nature, most stocks go down.

During the past three months, I’ve recommended several ways to hedge our risk in The Energy Strategist Portfolios. Specifically, I’ve recommended taking partial gains or using put option hedges on some of our biggest winners, including FMC Technologies, Bunge, Schlumberger, Potash Corp, Mosaic and Union Pacific. I’ve also been raising stops on many recommendations to lock in gains.

Risk management strategies always seem obtuse and difficult when the market is flying higher and earnings are strong and getting stronger. But these strategies have paid off during the past few weeks. Although none of the hedges have totally stopped the pain, they’ve certainly numbed it.

But now isn’t the time for panic; rather, it’s time to look for opportunity. Despite what you may have heard on television this morning, the world as we know it isn’t coming to an end. The long up-cycle in energy and most other commodities isn’t complete.

Although we could see more weakness in the next few weeks, the lion’s share of this move has probably already passed. And the panicky selling is throwing us some outstanding opportunities; we’ll likely see plenty of buying opportunities emerge.

One such opportunity that I just can’t pass up is Nabors Industries (NYSE: NBR), a new addition to the Gushers Portfolio. I outlined my bullish case for this stock in the Aug. 10 issue of The Energy Letter, Opportunities Knock Again.

To summarize, Nabors is a contract driller that owns land-drilling rigs. The stock is trading at a valuation level unseen since 2001. Back then, natural gas prices were under $2 per million British Thermal Units (MMBtu) compared to well more than $6 per MMBtu today.

As I noted in the Aug. 1 issue of TES, Earnings in Review, the North American drilling market is weak right now because of the selloff in gas prices during the past year and a half. And the Canadian drilling market is utterly terrible; several companies remarked that the market there hasn’t been this weak since 2002.

But Nabors has already priced in that bad news. And the market certainly isn’t as bad as it was back in 2001-02, the last time Nabors traded at current valuations.

Nabors has also changed a great deal since that time. The company now earns a large amount from foreign operations, and the drilling environment outside the US and Canada has shown absolutely no signs of weakness.

Nabors has been weak for months, but I don’t see much additional downside for the stock. And unlike some of the better performers in the energy patch, the stock isn’t likely to be used as a means for hedge fund managers to raise cash; it just hasn’t been enough of a winner.

Here’s how I recommend playing the stock: Take about half of what you’d normally put in a TES recommendation and buy Nabors under 28.75.

Because of the volatile market conditions, I recommend a wide stop loss at 22.50. By taking a smaller-than-average position, you can reduce your risk.

I’ll look to recommend buying more Nabors’ shares in the next few weeks as markets stabilize. I’ll also be offering a more in-depth look at the company in next week’s issue of the newsletter.