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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: marc chatman who wrote (14255)3/9/1998 8:47:00 PM
From: Thean  Read Replies (1) of 95453
 
Marc, the e&p budget situation is more psychological than anything else. The markets always needs an excuse to do certain thing - whether it is true or not. That's why prices always move first and explanation later. Traders can profit from this mentality because they sell or buy first and ask question later.

I think there is no doubt that a weak crude price will never help the sentiment of all companies involved in finding, producing and selling oil. The key, as they say, is all in timing. The three e&p future budget scenarios are as followed:

1. No increase for 1999 and next two years, same as 1998. This will put a cap on the growth rate of dayrate, and thus the earning growth rate as well, unless the drillers can derive more earning by becoming more efficient, e.g. through innovative technology. This scenario will put a cap on the upside of drillers going into 1999.

2. Overall increase in budget versus 1998. This is needed to fuel continuing growth in dayrate and this is the main reason why we were attracted to investing here. This is to be expected.

3. Overall decrease in budget versus 1998. This will not be good short term but good longer term because it will hurt everybody short term and create an even greater gyration when oil demand cannot keep up with supplies in a year or two.

If the investment period is 3 years - it is safe.

One year - may not

3 months - the outlook is not great.
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