Roy M. Blumberg
Drilling for dollars
Oil service poised for catch-up
By Roy M. Blumberg, CBS MarketWatch
Last Update: 10:44 AM ET Feb 8, 2000
Commentary Section
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NEW YORK (CBS.MW) -- Several times in the last year, I mentioned
that energy stocks were a good place to invest.
The companies in the oil field service area should
be the prime beneficiaries of the recovery in oil
prices over the last year, from $11 per barrel to
nearly $30.
There are a few factors in the current cycle in oil
drilling that are a little different than they were in
past cycles. First, the recovery in drilling activity
has been uneven. Until recently, the vast majority of
new activity took place in North America. Most of
the North American activity has been in shallow gas drilling.
A company I mentioned in my Aug. 23, 1999 column, Nabors Industries
(NBR: news, msgs) is a key example of this trend. See previous column.
Its stock price reflects the strong demand for its equipment. It would be
expected that less expensive, easy-to-drill wells would be the first to be
started in a recovery.
But, other areas, like offshore drilling in the Gulf of Mexico and
international drilling, have been much slower to recover during this cycle.
In fact, the pick up in these areas has only begun in the last month or two.
The second difference in this cycle, is the unevenness of stock prices of
energy service and drilling companies. This is probably due to the uneven
recovery in drilling activity.
I believe this presents investors with another
opportunity in energy-related issues. Many smaller
specialized and international companies have seen
their stock prices lag badly. With the recovery in
drilling activity accelerating beyond shallow land
drilling, many of these stocks are due for a catch
up.
Poised for success
Newpark Resources (NR: news, msgs) provides
environmental services to the oil and gas
exploration and production industry, primarily in the
Gulf Coast market. Services include processing and
disposal of waste and drilling fluids. They also
provide mats used in drilling in transition areas.
Drilling in the Gulf of Mexico and transition areas
has begun, almost one year after oil prices began to
recover.
The company had a loss in 1999 (fourth quarter
earnings will be announced in March), but should
turn profitable in 2000. Consensus estimate for 2000 is 26 cents and
could hit 50 cents in 2001. I believe the stock price could reach $12 in
the next year.
Varco International (VRC: news, msgs) manufactures products used in oil
and gas drilling. The company's products include integrated systems for
rotating and handling various sizes and types of pipes used on drilling rigs,
hoisting equipment, rotary equipment, drilling rig instruments, and solids
control equipment.
All of these products should see increased demand, as drilling activity
spreads from domestic land drilling to other areas like offshore and
international. Fourth quarter earning have not been released yet. The
consensus estimate for 2000 is currently at 43 cents and should move
higher in 2001, as the drilling cycle continues. I have a target of $15 in the
next year.
The fact that both of these stocks are trading close to 52-weeks lows,
suggests that investors are not willing to pay up for these companies yet. |
