Strictly: Drilling and oil-field services Message Board

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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: Sharp_End_Of_Drill who wrote (74906)	9/27/2000 6:45:56 PM
From: jim_p	Read Replies (1) of 95453

Investment Highlights from ML 9/26/00: "We are also becoming more optimistic about seismic." • The planned release of 30 million bbls from the US Strategic Petroleum Reserve is likely to push oil prices lower over the near term and could well put some additional downside pressure on oil service stocks. • Notwithstanding the possible near-term weakness, we believe that the release of the SPR oil (and weakness in the group that has already occurred during the week ended Sept 22 on the speculation that such an event was likely) creates a unique buying opportunity. • The release of the SPR oil should serve to cool the overheated oil markets at least temporarily. But, 30 million bbls is unlikely to raise US inventories close enough to the averages of the last 5 years. Thus, we believe that oil prices should remain well-above levels needed to fund a powerful drilling upcycle. • More important, the SPR release does nothing to resolve the issue of capacity constraints both for oil and North American natural gas. In fact, a pullback in oil prices reduces the risk that oil prices will rise so far that demand will decline thus strengthening the long cycle case. • Near term, we believe that oil service stocks have already partly discounted the lower oil price with the OSX Index at 125.12, down 13% from the all-time high of 143.98 reached on 9/12. • The fundamentals behind our bullish stance remain very much intact. Oil and gas production capacity utilization is tighter than in more than 20 years, and it should take several years of much stronger oilfield spending to add meaningful new supplies. Based on the longer-term price forecasts of ML’s oil and gas analysts, cash flows should be sufficient to support upstream capex that is at least 25% above the last cycle peak. • And earnings power of the oil service industry has increased considerably since the last upcycle helped by cost cuts and consolidations. We continue to believe that our 2001 estimates have upside potential of 10-20% and that most companies we follow will produce record earnings by 2002. • We still advocate a broad package of mid-cap oilfield equipment and service stocks and contract drillers as the way to optimize performance. We are also becoming more optimistic about seismic.

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