All - FYI - Heard on the Street
Investors Grab Oil Services,
Pumping Up Prices, Caution
By SUZANNE MCGEE
Staff Reporter of THE WALL STREET JOURNAL
Investors drilling for dollars in oil-services stocks have
struck gold in recent weeks. So why are some becoming
more cautious?
Many stocks in the group have set 52-week highs this
month. The good news is everywhere: Last week alone,
Rowan Energy estimated its net income will soar 45% in
1998, while Baker Hughes, a drilling-equipment
company, said it expects revenue to double over the next
five years.
The latest example of the market's enthusiasm: An initial
public offering of Unifab International, which makes
decks for offshore drilling rigs, priced after the market
closed Thursday, has more than doubled in price in only
two trading days. After being sold at 18, the stock
closed Monday at 36 5/8, up 4 5/8, or 14.5%, on the
Nasdaq Stock Market.
The exploration business, which fuels demand for the
drilling and related services these companies offer, is
booming. At a lease sale by the U.S. government last
month, energy companies paid 75% more than was paid
a year ago for exploration rights off the coasts of Texas
and Louisiana.
But Mark Urness, senior oil service analyst at Salomon
Brothers, warns: "We've become more selective. It's
time to look for niches and be more watchful."
Yves Siegel, senior oilfield-services analyst at Smith
Barney, says he's pruned ratings on stocks like
Transocean Offshore and Smith International because the
recent run has left valuations stretched. "There's going to
be a lot more short-term volatility," he predicts. "The
earnings expectations are rising dramatically, and you
need to be sure that hurdle isn't too high."
Investors are listening. Jim Weiss, chief investment
officer at Boston-based State Street Research, had
about 8% of the firm's stock portfolio in oil-drilling and
oil well-service stocks at the beginning of the year, about
double their weighting in the Standard & Poor's
500-stock index. Now he's cutting back.
"We're at a point in the cycle where the fundamentals for
these stocks are still very strong, but we're much less
inclined to be overweight," says Mr. Weiss. Salomon's
Mr. Urness notes that the 11 offshore drilling companies
he follows have seen their price/earnings ratios soar from
11 times forecast 1998 earnings in April to about 17
times earnings currently. In the past 12 months,
Transocean has gone from trading at 14.3 times
prospective earnings to 18 times earnings.
Gone are the value investors, lured in 1995 and 1996 by
the group's unique blend of improving fundamentals and
below-average valuations. In their place have come
momentum players, keen to chase rising stars, but
equally eager to bolt the group at the first sign of trouble.
The arrival of more speculative players has sent stock
prices higher, and left them much more volatile. Options
activity has skyrocketed, as buyers seek to make
leveraged bets on further gains. Last week, options
trading on many stocks hit volume records, according to
Track Data, a firm that monitors options trading activity.
The arrival of momentum players "means you're taking a
higher risk," says Mr. Weiss. "It becomes much more
important to really understand the fundamentals. You
don't want to own big positions in stocks if momentum
players are there in a big way and valuations are the least
bit shaky, because it'll be harder or impossible to ride
out the volatility."
Robert Shoss, senior analyst for the AIM Weingarten
and AIM Charter funds, which together have $11 billion
in assets, says he's still bullish on the group. Energy
demand is strong, he says, and natural-gas prices have
settled at above-average levels. But within the group,
he's starting to concentrate his holdings in a few areas.
He favors companies with exposure to deep-water
drilling, where the barriers to entry are higher and where
it will take many more years to add new drilling rig
capacity.
Salomon's Mr. Urness says Diamond Offshore Drilling, a
deep-water drilling company, could benefit from the
strong interest seen during last month's lease auction.
Loews Corp. last week agreed to sell a roughly 11%
Diamond Offshore stake in a note issue convertible into
Diamond stock at $65.04 a share after Oct. 1, 1998.
Although the shares have slipped from their peak of
nearly 59, traders say there's demand near the current
price of 54 3/4 .
Other stocks that still seem like bargains include
land-drilling companies, which haven't seen the same
kind of explosive gains as their offshore counterparts,
analysts say. "Utilization rates are rising, but they're still a
year or so behind the offshore industry," says Mr.
Urness. "There are ways to play this story with less risk,
where the story is less advanced."
Pool Energy Services, which services oil wells, has begun
to attract the attention of momentum players and may
see further gains, Mr. Urness says. Cooper Cameron,
which sells wellhead-pumping equipment, is another
oilfield-services concern that recently has received higher
investment ratings from analysts. |
