Hello Yogi and thread <Dick Cheney. Any comments?>
Research Analyst: Bob Hirschfeld (11/9/00)
Although we will not know how Florida's electoral votes will be awarded for days, or even weeks, it is not too early to begin examining what a Republican-controlled White House would mean for the oil industry.
After all, both George W. Bush and Dick Cheney have considerable experience in the industry. W. once ran an exploration company, while Cheney served as the CEO of Halliburton (NYSE: HAL - Quotes, News, Boards), the world's largest oilfield services corporation immediately before running for Vice President.
Should he become President, the Texas governor has proposed boosting domestic oil drilling. Al Gore, on the other hand, has made campaign claims assailing the role of "Big Oil" in contributing to higher gasoline prices. The Vice President is also known for advocating both restraint in energy use and the development of alternative energy sources.
James Stone, UBS Warburg oilfield services analyst, said "the effects of a Bush Presidency on the oil industry would probably be neutral to positive."
"During the campaign, he proposed that we solve our energy problems by drilling more, and by opening up extra acreage. Basically, Bush wants to approach energy from the supply side, and Gore from the demand side."
First Albany's exploration and production (E&P) analyst, Bob Christiansen, said a Bush Presidency would be more respected among Gulf oil producers, who "didn't take kindly to Gore's role in releasing oil from the Strategic Petroleum Reserve."
Of course, it can be difficult handicapping industries on the basis of Presidential resumes. As Stone noted, "We thought George Bush, senior, would be a big positive for the industry, but it didn't turn out that way. Once you're in the White House, you become responsible to a far broader constituency."
Whoever emerges as the winner, Stone sees the oilfield as an extremely attractive place to be these days. Oil drillers and services companies just turned in a terrific third quarter. Of the 18 companies in Stone's coverage, 15 beat consensus expectations.
Those 18 companies collectively increased revenues 20% versus year-ago levels, with service companies advancing revenues by 14%, while drillers juiced sales by 52%. Earnings growth grew by 106% in the quarter compared to a year ago, well ahead of the second quarter's share-profit growth of 42%.
The oil services sector also saw strong cash flow growth, with EBIT (earnings before interest and taxes) margins increasing to 11.6%, up from 8.3% the previous quarter and from 4.7% one year ago.
Do those strong numbers suggest a cyclical peak? No way, claims Stone, who believes "we will continue to see strong demand for oil and gas over the next several years."
Stone notes that drilling levels continue to be high. In North America, the rig count rose 45% year over year, and international rigs were higher by 23%, though Stone sees that metric as "accelerating."
Consumer fears about keeping warm this winter may prove well founded, given that inventory levels for both heating oil and natural gas are at multi-year lows. Amazingly, despite the surge in drilling for natural gas (this year's gas well completions are 22% above year-ago levels) US gas production only registered a skimpy 0.1% increase during the third quarter.
Another bullish factor revolves around major oil company capital spending. According to Stone, this key driver of oilfield services revenues was lackluster the third quarter and remains lower by 13% year-to-date. In other words, the terrific quarter enjoyed by services companies could have been a lot better.
Christiansen concurs that the current oil cycle still has legs. Though the exploration cycle is typically 22 months in duration, and 30 months at the extreme, the current cycle, now 20 months old, probably has further to go. Christiansen believes electricity demand from new gas-fired turbines soon to come on line will likely prolong the current cycle into 2002-2003. According to the analyst, "the current cycle will likely stay long and strong."
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