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Top Stories: Oil Notebook: Action in the Patch Gets Ugly
By Mavis Scanlon
Staff Reporter
1/10/98 12:30 AM ET
After a tumbling day in oil prices Friday, a long look at the
sector. Dig in.
Uncertainty Rules
"There's a lot of uncertainty out there," "the sentiment
could not be worse" and "we don't think the industry is as
bad as the market is telling us" are what analysts as well as
money managers were saying on another harsh trading day
for oil service stocks.... The Oil Service Index closed Friday at 91.47, a drop of
6.7%, on top of a 5.6% drop Thursday -- levels not seen
since late June. Anything related to oil is down. As one
trader said earlier this week, "Oil is kind of sucking wind."
Crude oil futures for February delivery ended at $16.63 per
barrel, down 34 cents. Futures contracts further out were
also down -- crude for June delivery fell 24 cents to $17.50
after an intraday lift of 5 cents.
No Mercy
Investors showed no mercy Friday to oil companies.
World oil demand has been projected to slow by 400,000
barrels a day over the next two years. Given that drop,
combined with El Nino-driven warm weather -- it was sunny
and 65 in Manhattan Friday -- and Iraqi production coming
online, most likely this month, both majors and indies took a
hit.... This week's carnage in the oil patch comes on the heels of
Salomon Smith Barney's Survey and Analysis of 1998
Worldwide Oil and Gas Exploration and Production
Expenditures, a detailed annual survey of oil company
spending. News reports have zeroed in on the 10.9%
average increase slated for 1998, which is lower than
expected. What has been overlooked, however, is that more
than half of the respondents in the survey -- more than 200
major and independent oil and gas companies -- reported
exceeding their original 1997 budgets.
Get Set for Earnings
Monday begins the earnings reporting season, and so far
no surprises are expected in the drilling and service sectors.
Rowan Cos. (RDC:NYSE) has the dubious distinction of
kicking off the current earnings season for the service
companies, and will report before the market opens on
Wednesday. Heading into 1997 Rowan was downgraded for
undertaking construction of new rigs on spec, or without a
contract. At this point, the first of three Super Gorilla class
jack-up rigs, Gorilla V, is scheduled for delivery in October
1998. The rig is contracted to work in the North Sea for
Amoco (AN:NYSE) under a $67 million contract. That
translates to a dayrate of $184,000.
Gorilla VI and Gorilla VII are currently being bid out to three
prospective customers at dayrates north of $200,000, said
company CFO Ed Thiele. The firm designed the Amoco
contract for a year with an option for another year to take
advantage of market rates at the time it signs the new
contract. Bill Provine, vice president of investor relations,
thinks the company will get more next year, and the year
after that. "We've been right for three years," he said.
Gorilla V should boost 1998 revenues for Rowan, which is
about all investors care about anymore. Most drilling and
service companies will meet or better consensus estimates
for the quarter ended December 1997, but it's their future
earnings that are being questioned. The overwhelming
attitude in the investment community is "what are you going
to do for me this year," said Kurt Hallead, an analyst with
San Francisco-based hedge fund Cambridge Investments.
Rowan closed down 2 3/16 at 24 on Friday.
"We're back into a proving period," said John Lovoi, who
covers several drillers and service companies for Morgan
Stanley Dean Witter in Houston. "Everything that can go
wrong with the intermediate crude market has gone wrong."
Although Asia got much worse than anyone realized --
himself included, he said -- the fundamentals have not
deteriorated as much as the market has been dictating, and
several companies, BJ Services (BJS:NYSE), Smith
International (SII:NYSE) and Camco International
(CAM:NYSE) included, will exceed what the market
expects, he added. Morgan Stanley has performed
underwriting for Camco.
Following is a partial schedule of upcoming earnings
releases:
Helmerich Payne (HP:NYSE): Jan. 22. Consensus
estimate is 50 cents, up 23%.
Baker Hughes (BHI:NYSE): Jan. 26. First Call
consensus estimate is 45 cents (the company says it will
meet the I/B/E/S consensus estimate of 44 cents).
Marine Drilling (MDCO:Nasdaq): Consensus estimate
is 36 cents, up 125%.
Schlumberger (SLB:NYSE): Week of Jan. 19 (company
declined to give a specific date). Consensus estimate is 75
cents, up 44%.
Dresser Industries (DI:NYSE): Third week of February.
Consensus estimate is 40 cents, up 33%.
R&B Falcon Drilling (FLC:NYSE): Mid- to late February.
Report may be slightly delayed due to merger. Consensus
estimate is 41 cents, up 110%.
Turnkey Dwindling?
Transocean Offshore (RIG:NYSE) announced Tuesday
the discontinuation of its turnkey operations in the Gulf of
Mexico. In turnkey contracts, a driller agrees to drill a well to
a specified depth for a fixed price. If the driller spends more
than that fixed price, it loses. This type of operation, in
which the drilling company takes on every operational
aspect of drilling the well, is on the wane in the Gulf. Why?
How about a $12.6 million loss on one well? That's what
happened last quarter to Transocean, and the loss will hurt
earnings by about 8 to 9 cents per share, said Jeff Chastain,
RIG's director of investor relations. The company hit
geological problems at 15,000 feet in a well it was drilling for
Shell. "The business has not made money for us in two
years," Chastain said. RIG closed Friday at 37 1/4, down 2
3/4.
Limited profit margins in the Gulf's turnkey operations are
part of the problem, Chastain said. The wells are typically
awarded one at a time, as opposed to internationally where
you are awarded three or five wells at a time. Profitability can
increase over the second, third and fourth wells a company
drills, he said.
In third quarter 1997, Rowan also discontinued its turnkey
operations and took a $20 million loss. Noble Drilling
(NE:NYSE) has also reduced its leverage in that area, says
Joe Agular at Johnson & Rice in New Orleans. "We're down
to a handful of players in turnkey," he says. "It's one of
those businesses where volume offsets risk." One of the
bigger turnkey players in the Gulf is Global Marine
(GLM:NYSE), Agular said.
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