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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: Erwin who wrote (13651)3/5/1998 3:08:00 AM
From: Czechsinthemail  Read Replies (3) of 95453
 
I think the Barron's article raises some good points. One is to what extent rising dayrates and full utilization will persist in a weak oil price environment. Wesley Maat's assumption that because E&P companies face cash flows about 15% lower than last year they will cut back on drilling so that utilization and/or dayrates will fall has been the rationale behind the drop in stock prices for drillers since last fall. So far, I haven't seen evidence of either drops from essentially full utilization or lower dayrates. I think we may be seeing what Global Marine's IR person describes as a flattening of dayrates. I think that translates into not going up as fast as they have been rather than not going up. Though some cutbacks in E&P budgets are certainly possible, so far any cuts have been matched by others stepping forward to bid up the rigs.
My take on the risk is different. I agree that the prospects for the deepest drillers look strongest, particularly with lower oil prices. But the price/earnings of the shallower drillers are so low, that they discount an extreme slowing of demand. I suspect the market is overdiscounting both the shallow and the deep drillers by adopting an extremely myopic view of the supply/demand situation for oil. The currently bearish situation of relative oversupply and underdemand is not likely to persist. So long as oil can be profitably produced and sold, there will be a demand for drilling to replace the reserves. Since offshore drilling is more cost effective than land drilling, it will remain a higher priority in the budgeting of drilling programs. The likely bet is that companies will continue to contract rigs even with weak oil prices to have oil to sell in the future when oil prices are higher.
The risk in this scenario is that oil prices drop enough that drilling begins to slow and there is much more price competition depressing dayrates. There may be some signs of this among the land drillers. But among the offshore drillers, the fear that drilling demand will slow is present, but so far the slowing isn't. So you can buy the drillers on the assumption that oil prices will rebound, or on the assumption that they won't weaken enough to slow drilling demand to the point where it hurts. Either way can work. Against this stand the big maybe's. Maybe oil prices won't rebound, and maybe they'll continue to fall and choke off drilling demand. So far it simply hasn't happened, but the maybe's persist. It has created the tantalizing situation in which all that has dropped has been the stock prices and the saliva of bullish investors drooling after them.

Baird
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