Yesterday, Wildcatters Portfolio holding Dresser-Rand (NYSE: DRC) cut its third quarter and full-year operating income guidance, and the stock sold off around 10 percent on the session. I’ve been rating the stock as a hold in the Portfolio, and I recommended taking partial profits on the stock during the summer.

That said, yesterday’s selloff was a major overreaction to the announcement. The main problems were twofold: a prolonged strike at Dresser’s manufacturing facility in Painted Post, NY, coupled with some changes in the firm’s after-market business.

As for the strike, I see this as only temporary. And it’s nothing new; Dresser discussed it at length in its second quarter call on Aug. 1. Basically, the labor agreement in place at this facility expired in early August, and management wanted to push through some significant changes to the deal.

The deal had been in place for more than two decades with minimal changes and included legacy provisions and benefits that are far different from Dresser’s other facilities. The company had hinted that a strike was possible in its second quarter earnings call.

In the end, the union and Dresser couldn’t cut a deal. Dresser went ahead with a contingency plan that involved hiring temporary workers and outsourcing some functions to other facilities. This, of course, caused an increased in costs; as it turns out, the increase in costs was above Dresser’s original forecasts.

However, this headwind is easing. Dresser is now hiring permanent replacement employees at more favorable terms. Permanent workers are far less expensive than temporary workers. The company stated that even if the strike continues, it will have zero impact on 2008 results; the impact will also diminish by about 25 percent this quarter against third quarter totals.

The second issue is slightly more meaningful. Dresser’s aftermarket business is essentially the sale of parts and components for compressors it manufactures and those made by other companies. Dresser reported softness in this business for the quarter.

Although management didn’t elaborate in yesterday’s statement, my guess is that this is just an extension of the same problem that they did highlight in great depth in their last quarterly call. Dresser’s big customers in aftermarket sales are national oil companies (NOCs), and two of its biggest customers changed their procurement and budgeting process.

The end result is that purchase decisions now have to clear through several offices at these state-controlled customers. This has lengthened the average cycle time for new aftermarket part purchases from about 26 days in 2006 to five months as of the second quarter.

However, demand for the parts is still very much there. So orders that would have normally come through in the first quarter are just now hitting.

But as we move into the first quarter of 2008, the company will start to “lap” these changes. In other words, the company will start to see delayed orders from this year come through, eliminating the effect of the procurement changes. Orders will be lagged significantly but will still flow through.

Bottom line: To take advantage of the dip in the stock, I’m now changing my advice on Dresser from hold to buy under 40. I suspect that with the bad news now out of the way, Dresser could actually beat estimates and rally through its scheduled Nov. 7 earnings report and conference call. In fact, the stock rallied sharply intraday yesterday on heavy volume, suggesting I’m not the only one who sees this as a buying opportunity.

The fundamental growth drivers for the compressor industry remain very much intact. Even after yesterday’s tumble, the stock is up about 60 percent from my original recommendation.

Today’s warning from Nabors Industries (NYSE: NBR) shouldn’t have come as a big surprise to anyone. As I outlined in the Aug. 22 issue of TES, Drilling Down, Nabors’ North American business is weak right now because of low natural gas prices. That operation was the crux of today’s warning.

My thesis remains that the stock has priced in a great deal of bad news on its US and Canadian operations and the market isn’t giving it full credit for its strong international business. The stock is still up nicely from my recommendation at $27.58 in August.

I originally recommended that subscribers take a half-sized position to guard against the risk of gas-related volatility in Nabors. For those subscribers who took that advice, today’s dip offers an opportunity to put in the other half of that position.

With the bad news out of the way for Nabors, I expect the stock to rally going into its Oct. 23 conference call and earnings report. Nabors Industries remains a buy.