Oil and Gas: Can the Party Continue?
By Russell Pearlman
NO MATTER HOW many times you see your bill, you still get sticker shock. How could it cost twice as much to heat your house these days than it did in 1999? You could just resign yourself to months or years of watching your money go up in furnace smoke. But we've got a better idea: Why not do something about it.
Since late last year, SmartMoney has been recommending that readers take revenge against high energy bills by investing in energy-related stocks, particularly the drilling and exploration companies. In our ``Where to Invest in 2001'' portfolio, we suggested big-time drillers Nabors Industries (AMEX:NBR - news) and Patterson Energy (NASDAQ:PTEN - news), along with production firms Anadarko Petroleum (NYSE:APC - news) and Devon Energy (AMEX:DVN - news). On average, they've risen 21% since we picked them.
We still like those companies, and a couple of others. The reason: Not much has changed since December. As Financial Editor Jersey Gilbert notes in his column this week, the forces driving oil and gas prices higher are still in place. Many parts of the nation face energy shortages (just look at California's dilemma). And energy commodity prices are still high. Oil continues to hover around $28 a barrel. Gas prices have fallen considerably since their December high of nearly $10 per million British thermal unit (BTU) foot, but they're still hovering around $5.30, well above normal midwinter prices.
Prices might dip somewhat if members of the Organization of Petroleum Exporting Countries start bickering amongst themselves (an OPEC minister meeting March 16 will determine whether that's a likely prospect), but few analysts believe the price of oil will drop below $20 a barrel.
High prices inspire multinational corporations like BP Amoco (NYSE:BP - news) and Exxon Mobil (NYSE:XOM - news) to ramp up production. Those guys are big, but they need help with drilling and exploration. Enter the countless smaller companies scattered across the oil patch. The number of rigs in use around North America rose by 30 last week to 1,151, up 8.8% since late last year and the highest count since 1997, according to Baker Hughes (NYSE:BHI - news), an oil-services firm that tracks drilling activity. All but five of those are new natural-gas rigs. And, based on the rising number of rig permit requests, it's unlikely that drilling growth is going to slow down for a while.
Even oil companies think gas reserve and exploration companies are good investments. On Wednesday, Shell Oil, a division of Royal Dutch Petroleum (NYSE:RD - news), put in a $55 a share (about $1.8 billion) bid for Barrett Resources (NYSE:BRR - news), a company that digs for gas primarily in the Great Plains and the Rocky Mountains. Investors bid up Barrett to above $61, thinking Shell will have to sweeten its offer. And that bodes well for industry stock prices.
In addition to our earlier picks, we like Weatherford International (NYSE:WFT - news), which makes drill tips, and Diamond Offshore (NYSE:DO - news), which excels in semisubmersible drills, equipment that can work up to 3,000 feet below the ocean surface. Both are up more than 20% since December, but analysts think they still have room to run.
Weatherford has had a nice run of late, and a couple of factors could keep the momentum going. New products, first of all. Weatherford makes equipment that enhances the efficiency of drills, such as screens that keep sand away from key parts. They should support higher sales throughout 2001 and 2002. In addition, since Weatherford is strong in foreign markets, where it supplies basic drill tips and other equipment to foreign rigs, it will benefit in the outsized growth in drilling outside of North America. International rigs are up 30% since February 2000, according to Baker Hughes, and most analysts expect even more drilling later in the year.
Diamond's stock might be a little bumpy throughout March since the firm announced Wednesday that it was converting $400 million worth of bond debt into common stock. That'll add millions of shares to the market, which could lower the company's potential, but only in the short term.
Demand for semisubmersible drills has lagged behind that for other types in recent years. But the boom in drilling activity is changing that. Analysts report that Diamond's day rates — the amount it charges for its equipment per day — have risen sharply since late 2000. The company could charge only around $30,000 a day for its standard rigs only a few months ago. But strong demand has given the company more pricing power: Diamond's executives have told analysts to expect day rates of $40,000 to $45,000 a day in 2001.
Diamond isn't exactly cheap. The company has a price/earnings ratio based on 2001 earnings of about 30, but its earnings are expected to grow 40% over next year. But given the acceleration in its day rates, analysts think it can keep going this year. |
