Frankly trust your judgement better than Mr. Racanelli's but here's another view of oil services from Barron's yesterday. Skip to last paragraph, is this the subsector you are concentrating on?
Crunch Time Is Still Coming for Oil Service Stocks
By Vito J. Racanelli
So many investors have lost so much money in oil service stocks of late that the recent strength in the group has been a cause for some celebration.
The new hope has been spurred on by two surprise mergers. Halliburton
announced last week that it would acquire Dresser Industries for about $8 billion, creating the largest oil service company in the world. And EVI Inc. said Wednesday it had agreed to acquire Weatherford Enterra Inc. for about $50.17 a share in EVI stock. Weatherford, which rose $8 a share Tuesday to $44, finished unchanged Wednesday. EVI shares, meanwhile, dropped $4 1/8 to 48 11/16 Wednesday.
With many drillers' stocks selling at more than 30% off their highs and at nearly half the broader market's price-to-earnings multiple of 21 times 1998 estimated earnings, it's no surprise that bargain hunters are poking around the group. Both the oilfield equipment and services group and the drillers are among the market's best performers this week. And in his column for Barron's Online, technical analyst John Murphy says the sector appears to have bottomed out (see Getting Technical, March 4th).
But though the stocks seem to be bouncing back from their absolute lows, betting on consolidation in this business is a dicey game. And frankly, the fundamentals of these companies still don't look good: Oil prices remain significantly lower than the expectations of only a few months ago, and crude could fall still further before it recovers.
Also, while those relatively low price-to-earnings may look compelling, at least one industry analyst, Wesley Maat of UBS Securities, recently wrote: "We believe consensus estimates appear too high and will likely retrench further in coming months…"
The reason? In April and May, many contracts for drilling rigs are coming up for renewal -- nearly 33% of Gulf jackup rigs, in fact [the kind that are towed and set up in relatively shallow water]. When that happens, the exploration & production (E&P) companies that use contract drillers to extract oil for them will undoubtedly try to cut better deals because of the declines in crude prices that have already occurred. Generally, the lower the price of oil, the lower the day rates drillers can command for their services.
As a result, Maat estimates that E&P company operating cash flows will fall by 15% in 1998. And the pressure to negotiate lower day rates will be even stronger on the smaller independent operators, whose projects are more sensitive to the price of oil. The upshot: with lower day rates, the drillers could be hurt more than Wall Street is expecting.
David Herasimchuk, head of investor relations for offshore driller Global Marine, acknowledges that prospects for rig day rates have become clouded of late. Though rates have risen sharply from a year ago -- propelling the oil service stocks much higher through most of 1997 -- jackup rates have begun to flatten out in the last couple of months, he tells Barron's Online. His prognosis? "Well, that will depend much on how oil prices move in the next few months," he replies. In other words, cross your fingers.
Herasimchuk also notes that some operators are talking about cutting their production budgets. If they do, it will create idle rigs and that could further pressure day rates, he adds. That, of course, would be very bad news for drillers and oil service stocks in general.
Is there any shelter from the storm? Weekday Trader has pointed out that oil-service firms exposed to deep water exploration are most insulated from the vagaries of crude oil prices (see "Deep-Sea Diving for Bargain Drillers," February 4, 1998). |
