Strictly: Drilling and oil-field services Message Board

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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: upanddown who wrote (12736)	2/24/1998 5:45:00 PM
From: Czechsinthemail	Read Replies (1) of 95453

The market can be easily schizophrenic going back and forth between past history and future expectations. For example, people become obsessed with the great down cycle drillers and service companies experienced in the 80's even though it resulted from a major overcapacity that does not now exist, nor will it exist anytime soon. That overcapacity developed from high oil prices that stimulated major rig-building while encouraging cutbacks in oil use. Is it likely that low oil prices will create enough cutback in demand for drilling that the industry will suddenly be thrown into a major overcapacity? I don't think so. If not, then the prospect of continued high demand for drilling, contracts being rolled over at higher rates, very limited increases/upgrades of rig fleets should provide continued growth. Though I think this predictability of growth is greatest for the ultradeep drillers, I think it is likely to continue for all the offshore drilling companies. Contrast that with most other companies and you find better growth prospects and lower PE valuations -- particularly relative to the growth. Although weak oil prices have fed a climate of fear, the actual vulnerability from here seems pretty limited. The relatively low PE's provide a measure of downside protection against the possibility that drilling activity weakens and against the possibility of general market weakness. Because the sector has sold off so heavily, I think we are much closer to the floor than the ceiling -- unlike most of the market. The number of people who have tossed in the towel are a good indicator of a near-bottom market. The recent price action looks to me more like bottoming and basing than major collapse. Those afraid we're going down much further have most likely sold already. It increases the likelihood that the next major change will be to the upside. Though prices could certainly go lower, the expectation that they will seems particularly vulnerable to disappointment. Eventually the selloff gets washed out and the risk/reward situation becomes irresistible -- even though abundant fear remains to make things look very scary. It is hard for me to imagine anyone who has held drilling companies this long selling off at this point. On the other hand, it is easy for me imagining people shifting some funds into these companies in a bargain-hunting spree. I've been looking for significant price weakness to buy more, and so far haven't seen it. Baird

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