From Frost today:
The political factor (short-term) - The presidential election will likely have a short-term mostly psychological impact on the oil service stocks. A Bush victory in the presidential election would likely give the oil service stocks a quick 5% jump near-term, which would likely be followed by steady longer-term improvements. A Gore victory, on the other hand, would likely send oil service stocks 10% lower near-term. However, even under the scenario of a Gore victory, the strong underlying macro fundamentals of the oil service sector would ultimately drive oil service stock prices higher, albeit at a slower rate than would be likely under a Bush presidency.
Winter weather (medium-term) - The recent spate of warmer-than normal winters has been driven more by El Niño and La Niña factors than by the potential effects of global warming. Therefore, as the effects of El Niño and La Niña ebb, the likelihood of a more normal winter this year becomes increasingly likely. Even a repeat of last winter's warm weather would likely support natural gas prices above $3 per Mcf. A "normal" winter could easily lead to natural gas demand increases in the double-digit range and support prices north of $5 per Mcf. From the weather standpoint, we currently embrace what we consider to be a conservative scenario that falls somewhere in the middle. Under any of those three weather scenarios, the economics would continue to support much higher levels of natural gas directed drilling activity throughout North America. Meanwhile, a protracted cold winter should also support higher heating oil and crude demand and prices in the U.S. and Europe, thereby delaying the expected 2001 crude price decline forecasted by many analysts. In short, colder weather will likely lead to higher oil service stock prices at least through the January - February 2001 time frame.
The global economic outlook (longer-term) - Most major stock benchmark indices are down year-to-date or are pointing down recently. We believe this points to investor expectations for a worldwide economic slowdown. A global economic slowdown would further lead to less demand for crude, lower crude prices, and ultimately less worldwide oil directed drilling activity --- in effect, under-cutting the international drilling recovery currently underway. While we believe current high oil prices will lead to a slowing of global economic growth, we do not expect economic recession (i.e. negative economic growth). It follows from that assessment that we expect growth in worldwide crude demand to slow, but not decline to negative. To support that belief, we point to 1998. During that year, growth of several global economies did turn negative. The Asian economy collapsed, and the South American and European economies declined. Only the U.S. economy continued to grow in 1998. During that economically bleak year, worldwide demand for crude oil still managed to increase 0.5% over 1997. We do not currently anticipate that the global economic outlook for 2001 is as bleak as 1998 was. In fact, we continue to expect meaningful crude oil demand growth of approximately 2.4% in 2001. Given the scenario of continued strong worldwide crude demand growth, we believe the longer-term outlook for oilfield service stocks remains favorable. We believe that outlook is not currently priced into most oilfield service stocks. Accordingly, we believe many oilfield service stocks will trade meaningfully higher over the longer-term as this outlook becomes factored into the stocks.
Summary - The combination of these three factors leads us to conclude that it remains prudent for investors to add to positions in select oilfield service stocks, particularly after any potential down-side risk associated with a possible Gore election victory has been priced into the stocks. |
