Oil service stock discussion
I have been looking at oils service stocks from time to
time. They never seem to be an extremely good value and I
am the first to admit that right now they don't seem to fit
in most value criteria either. However they are tremendous
cyclical plays and at multi-year lows and with the current
healthy oil prices, they are well worth a look, IMO.
Looking at Oil service from a value perspective, i think
that the P/E ratio does not provide an adequate measure.
The reason for this is that the earning quality differs
quite a bit from company to company, depending on what
depreciation rates is being used for the equipment. For a
capital intense business like Oil service, the depreciation
is a very significant expense. I have created a small
spreadsheet to illustrate this. Since I believe that
similar company own similar equipment, the depreciation
rates for oilservice company's should be similar, but they
are not:
DO RIG GSF(2002*) NBR
Revenue (mil$) 885 2820 2000 2225
Net assets (mil$) 2002 8368 4002 2433
Depreciation (mil$) 186 621 254 190
Depreciation time 10.7 13.8 15.8 12.8
Rev/net assets 0.44 0.34 0.50 0.91
Gross margin 49.30% 43% 34.00% 41.71%
As it turns out, DO has the most aggresive depreciation
(they write of their equipment in 10.7 years average) with
GSF being much less conservative (15.8 years). Since DO has
been doing so for years, their equipment is undervalued on
the balance sheet, so they should be able to achieve higher
gross margins a better Revenue/net assets ratio and better
return on net assets - as it turns out the spreadsheet sort
of confirms this.
NBR sort of stands out with a very high Rev/net asset ratio
but in my opinion this is because they are mainly land
driller rather than deep water driller. Land driller is a
mature business, uses simple equipment, is probably more
cyclical and has lower gross margins. This is why I am not
interested in NBR as an investment (it might be a good
speculation though).
I believe that DO is the best company amongst the drillers
also because of other factors, like anticylical investment
strategy (they upgrade their rigs when they are idle and
can afford to do so, because of their very health balance
sheet). Well i hoped i made some valid points here, i would
very much like to see other points of view! |
