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Oil-Drilling, Equipment Stks Down On Growth Worries
By Loren Fox and Daniel Guido
NEW YORK (Dow Jones)--Concerns that earnings growth would slow in 1998 sent shares of oil-drilling and oilfield-equipment companies lower Monday, as the recent volatility in the stocks continued.
Observers said the stocks were reacting to Friday's news that Shell Oil Co., the U.S. arm of Anglo-Dutch oil giant Royal Dutch/Shell Group of Cos., was keeping its 1998 exploration and production budget flat at $2.7 billion.
Investors viewed the news from Shell - an industry leader - as a negative sign for oil-services companies, whose robust earnings growth in the past few years has been driven by oil companies' sharp increases in exploration and production spending.
Oil-drilling stocks were the worst-performing Dow Jones industry group Monday afternoon, closing 7% lower on a market capitalization weighted basis. The Dow Jones index of oilfield-equipment stocks was down 2.1%.
Among the biggest decliners were: Diamond Offshore Drilling Inc. (DO), a deepwater drilling specialist, which was down 3 5/8, or 7.8%, at 42 3/4, and Marine Drilling Co. (MDCO), a shallow-water drilling specialist, which fell 2 3/16, or 10.5%, to 18 11/16. Also down was Schlumberger Ltd. (SLB), the world's largest oil-services company, which was down 1 1/8, or 1.4%, at 78 9/16.
Oil-service stocks enjoyed huge rallies in 1995, 1996 and earlier this year. But the entire group, and oil drillers in particular, have ridden a rollercoaster in recent weeks.
Declines in oil and natural-gas prices since late October have raised questions about how long oil companies can keep increasing their spending on rigs and other equipment.
"There's a concern that these (service) companies won't do as well if their customers don't do well," said Michael Smolinski, an analyst at First Albany Corp.
As for oil companies' spending, Principal Financial Securities Inc. analyst Magnus Fyhr said: "It's still going to be good next year, but it's not going to be the same (rapid) growth we saw in 1995, 1996 and 1997."
Also weighing on oil-service stocks is the warmer-than-usual winter in parts of the U.S., which has pressured oil and gas prices. Many experts aren't optimistic about commodity prices in 1998, due to the weather, as well as the prospect of rising production from the Middle East.
Several analysts said the market is overreacting to these concerns, because the fundamental demand for rigs and other oil services should support rising earnings for the next few years.
As a result, analysts expect the oil-services stocks to rebound, but the big question is when. Most agree investor sentiment is overwhelmingly negative, and the market needs some strong positive signs to turn around.
Fyhr said many money managers have told him they are loathe to buy oil-service stocks before the new year.
-By Loren Fox; 201-938-5267; loren.fox@cor.dowjones.com
"Dow Jones News Service"
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