Value players profit on oilpatch. "Try the Oil and Gas Service Index"
Deborah Yedlin, Calgary Herald, April 22
Chiaki Tsukomo, Associated Press / A businessman passes by a brokerage
house in Tokyo Friday. The Nikkei Stock Average was up 300 points early
but fell at market close.
Quick! Name a Toronto Stock Exchange sub index that has doubled in
value in the last 12 months but isn't associated with technology or
communications stocks.
Give up?
Try the Oil and Gas Service Index.
It hit a 52-week high of 2902.86 at the beginning of April, having been
as low as 1559.87 only 12 months earlier. That's 17.4 per cent higher
than the last cyclical high of 2472.1 reached in the third quarter of
1999 when oil prices averaged $21.38 US per barrel.
Instead of trying to play the commodity price swings in pure oil and
natural gas stocks, investors could have taken a leap of faith, jumped
into the service sector stocks and done quite well if they could
divorce themselves from the immediate doubles and triples which have
been occurring with great frequency in the tech sector.
Ensign has doubled since a low of $20.10, as has Prudential Steel.
Precision Drilling was $21.36 a year ago and closed Thursday at $47.45,
putting it at more than a double.
There's no question that the quick returns in tech stocks has skewed
investor expectations, but the performance of the service stocks is a
good example of what some of the boring value players have been doing
for a long time: Picking well positioned companies and staying with
them for longer than the quick flip.
And just because the service stocks have had a good 12-month run, there
is no reason to believe they have topped out.
Expectations are for 17,100 wells to be drilled in 2000 compared with
10,595 in 1999. First quarter rig releases (which means the drilling
has been completed and the wells turned over to the producer) are at a
record 4,894 and beating the last all-time high of 4,573 reached in the
first quarter of 1997, the last hot year for drilling. It looks like
the industry is on track to meet the estimates.
Of course, with that kind of a run, the obvious question is, what's left?
Sebastian Orsi at Dundee Securities says there is about 15 to 20 per
cent upside left in the bigger cap service companies but other analysts
have gone as high as 25 per cent.
"It all depends on their ability to grow beyond the cycle, which means
looking at their technological advantage, export markets and whether
they are buying other companies which fit with their strategic
direction," says Orsi.
While the bigger cap companies have been the primary beneficiaries of
the improving fundamentals in the oilpatch, analysts are waiting for
the share prices of the smaller companies to show some signs of life as
investors begin to move down the chain.
Although the service sector isn't quite as sexy as fibre optics,
doubling money within a 12-month period used to be considered a good
pass. With the recent market volatility, and a lot of the value players
sitting smug on the sidelines as their portfolio values are intact,
perhaps it's time to revisit the economic principle of rational
expectations and stop looking for the easy money.
As the service sector's performance shows, there are other places to
make money in the market. It might mean a longer time horizon but it
also might let you sleep at night.
As Mawer Investment Management's Bill MacLachlan said this week, "there
will be a reassessment of old economy stocks. They do have uses."
Deborah Yedlin can be reached at 235-7483 or
yedlind@theherald.southam.ca |
