And one more:
Top Stories: Oil Service Sector Focus: Consolidation Is King, but Depth Still Important
By Mavis Scanlon
Staff Reporter
5/11/98 1:06 PM ET
In an era of weak oil prices, merger activity has become a major focus for investors.
In the latest industry merger Baker Hughes (BHI:NYSE) said on Sunday it would buy Western Atlas (WAI:NYSE), parent company of seismic data giant Western Geophysical, in a stock deal valued at $5.5 billion.
But it's been more than consolidation in the oil services sector this year. A close look at stock performance shows that technological advancement and deepwater drilling have helped lift oil service stocks despite weak oil prices. Closer to shore, the industry is not performing as strongly. And some critics wonder whether the prolonged weakness in oil prices will start to chip away at some of the stronger companies in the group.
On Monday morning, investors chewed on the Baker Hughes-Western Atlas news. Baker Hughes' stock dropped, saddled by negative comments from analysts who argued that the company had overpaid for its purchase. But backers of the deal note that Baker, with strong presence in the drilling bits and tools markets, will now command a strong presence in the seismic data segment, allowing it to compete more powerfully with industry leader Schlumberger (SLB:NYSE). And competition is certainly growing keener. Recent nuptials have paired Halliburton (HAL:NYSE) with Dresser Industries (DI:NYSE) and EVI (EVI:NYSE) with Weatherford Enterra (WII:NYSE).
Outside of consolidation, the most significant issue in the oil services industry is the complexity or depth of projects. Deepwater and other long-term plays continue to perform powerfully -- but closer to shore the pain is plentiful. For example, Core Laboratories (CRLBF:Nasdaq), which specializes in complex reservoir-related technologies, closed at 29 5/16 Friday; the stock is up 62% so far this year. On the other hand, Maverick Tube (MAVK:Nasdaq), which closed Friday at 16 1/4, has dropped 36% since January. (TheStreet.com looked at Core in an April 30 story.)
A week ago Friday the sector rallied sharply -- the Oil Service Index jumped to over 122, a level last seen in December. That kind of interest indicates that investors remain deeply interested in the sector, despite the struggles of the past six months. Erik Gustafson, manager of the Stein Roe Growth Stock fund, says such gains could continue "if people can get the confidence that oil will stay over $16 per barrel."
Investors, momentum and value alike, "felt the beauty of the upswing last year," Gustafson says, getting a real taste for the possible rewards in the sector. And they are hungry for more.
It's no small wonder that oil service devotees ache for more good news. Oil service stocks returned more than 50% for 1997, 20 percentage points ahead of the S&P 500, and that included a fourth-quarter correction. These days the broad-based gains are a memory, and the sector has split into leaders and laggards.
For a rundown of the sector's winners and losers this year, check out TSC's summary of the industry in a related story today |
