Jim, this is my gift for the first anniversary of this thread.
February 23, 1998 Arvind S. Sanger (212) 892-3817
Robert Maina (212) 892-3450
Thomas R. Plante (212) 892-3457
OILFIELD SERVICES INDUSTRY WEEKLY RUMINATIONS
RATING: Outperf. Change: None
VIEWPOINT
o Commodity fundamentals in better shape than generally believed: While oil
prices continue to be weak, gas prices are surprisingly strong and
supply-demand fundamentals should drive oil prices higher in the next few
months.
o Oil companies' spending plans are surprisingly resilient: We expect the
oil companies to indicate only modest pullbacks from their spending levels.
The reasons for this include economic viability for most projects even at
current oil prices, belief that this oil price weakness is temporary and
strong natural gas prices.
o Oilfield service companies are in excellent shape and valuations reflect
the risks: Oilfield service companies are generally very well positioned to
withstand a modest downturn and valuations largely reflect the near-term
earnings risks, particularly for some of the sectors with the most earnings
risk.
o Recommendations: We find the risk-reward very compelling at current levels
and continue to rate the group Outperform.
WF: OIL SERVICES: STOCKS FOLLOW OIL PRICES LOWER; RISK-REWARD PROFILE FAVORABLE
Wheat First Union
DATE: February 24, 1998
ANALYST: Yves C. Siegel, CFA (804) 344-6424
ASSOCIATE: Stephen Waxman (804) 344-6441
KEY POINTS:
-- Oilfield Services stocks (measured by the OSX) fell 3.8% in tandem
with the 6.0% decline in WTI crude oil spot price
-- Over the past 10 years, the WTI crude price has fallen below
$16/bbl for two periods lasting about 4-5 months each
-- Long-term fundamentals, in our judgment, remain positive, driven by
growing worldwide consumption, estimated to grow at more than 2.0% per
annum through the year 2010
DISCUSSION:
The Philadelphia Oil Service Sector Index (OSX) fell 3.8% yesterday,
in tandem with the 6.0% decline in the West Texas Intermediate (WTI)
crude oil spot price. The WTI price fell to $15.18/bbl on news of the
imminent U.N. agreement with Iraq, its lowest level since late-March
1994.
We believe that the bearish fundamental news regarding oil prices has
largely been factored into the market. As noted before, these factors
are (1) nearly a 10% increase in OPEC's quota to 27.5/bbl per day; (2)
concerns regarding Southeast Asian demand; (3) the uncertainty
regarding the situation with Iraq; and (4) warmer-than-average weather
during this heating season, with degree-day indicators for heating-oil
demand 7.1% below a year ago and 9.5% below normal levels.
We believe that oil prices are not likely to remain at these depressed
levels. Over the past ten years, the WTI price has fallen below
$16/bbl two times and has stayed below this level for roughly four to
five months. Oil consumption is elastic and lower oil prices tend to
be a stimulant for demand. Additionally, we note that current excess
productive capacity is still at relatively low levels, at about 5%, or
less than 4 million barrels per day.
We continue to be believers in the positive long-term outlook for
energy demand. Even with a slackening in Far East energy demand, the
Energy Information Administration continues to forecast that world oil
consumption should grow by about 2% (or 1.5-1.6 million bbl/d) in
1998. Over the long term, oil consumption is expected to grow roughly
2.0% per annum through the year 2010 (when worldwide demand is
expected to be nearly 24 million barrels per day, or 32%, above
current levels). |
