More from RB Capital:
Upgrade Drivers Revisited
We believe US drilling is poised to re-accelerate into 1Q04 - no change.
International drilling up-cycle in nascent stages - no change.
Reduced gas price risk - being tested by the market.
Favorable seasonal trading patterns for oil service stocks - too coincidental to ignore.
Money Flow Assessment
Growth managers, if any remain in oil services, appeared to be exiting the group and chasing momentum plays.
Hedge funds tend to have a "pile on the rabbit" mentality, i.e. taking positions according to investor psychology and chart patterns.
Long-only energy specific funds have limited ammunition, especially those that had already been overweight.
At some stage, contrarian funds, value players and even hedge funds will rotate into the group.
Fundamental Assessment
Excluding weather, the next potential business catalyst will come in December in the form of E&P industry spending plans
Industry consensus calls for flat US drilling trends through year-end.
RBC concurs and foresees an increase into 1H04
International activity is expected to rise moderately into 2004, consistent with our view.
Product and service pricing will remain flat in the US and should rise internationally.
Commodity Price Assessment
GDP in excess of 2% is positive for energy demand and commodity prices
Natural gas prices are oil price and weather dependent
Oil prices will be determined by OPEC, the de-facto Federal Reserve of the oil markets.
At $28 oil, natural gas should average between $4.00-5.00.
Regarding weather, there is a 67% probability weather will be favorable.
In any event, the investment community will not have a good read until December.
Risk Factors
The primary risk for oil service stocks is a warm winter season AND oil prices averaging $25/bbl in 2004.
At $25/bbl oil, natural gas prices would most likely average between $3.50-4.50.
Besides commodity price, flat E&P spending in 2004 vs. 2003 could also negatively impact the group.
RBC estimates E&P spending will grow 5-10% on a global basis in 2004.
Stock Selection
Large-Cap Growth: BHI, SLB
Large-Cap Special-Situation: HAL
Mid-Cap Growth: BJS, SII, NBR, ESV
Mid-Cap Value: NE
Small-Cap Growth: PTEN, RDC
Small-Cap Value: PDS, FTI, OIS |
