full text from Briefing:Marine Support (oil & gas industry)
Panelists
 Ken Sill Vice President, Equity Analyst at Credit Suisse First Boston.
 Stephen Gengaro, Vice President, Oil Service and Maritime Analyst at Furman Selz.
 James Stone, Director, Oil Service Analyst at Schroder & Co.
Briefing: Day rates have doubled for offshore support vessels during the last three years. How much longer do you anticipate these companies enjoying such favorable pricing conditions? What factors will attribute to a downturn in day rate pricing?
Ken Sill: We're already beginning to see a change in pricing. Yet, while prices are coming down some, they are still quite good overall. Simply put, excess capacity will be the impetus for a downturn in pricing.
Stephen Gengaro: In the Gulf of Mexico, which is the core market for most businesses, we're seeing rates flatten a bit. On an individual basis, average day rates per quarter for these companies are coming up. However, this trend is a function of contracts rolling over rather than an actual increase in spot pricing. As a whole, I expect day rates to remain firm, but I don't see a significant rise from current levels. Any downturn will be driven by having too much supply. There are a number of new boats coming to market in the 3rd and 4th quarters, and there is concern that this added capacity will have a negative impact on pricing since the boats will be in operation sooner than the rigs they would serve which remain under construction.
James Stone: For the next 12 months at least, pricing will be flat in the Gulf of Mexico market as the new capacity coming online will keep the market balanced. With that said, excess capacity could be a catalyst for a downturn in pricing as could continued weakness in oil prices. At current levels, the price of oil is not high enough to stimulate enough incremental demand from independent customers in the Gulf of Mexico.
Briefing: In keeping with the trend of oil-related stocks, shares of marine support companies servicing the oil & gas industry are well off of their highs. Has the selling been justified? When do you expect a sustained upturn in these prices?
Ken Sill: It's hard to say if the selling has been justified. These stocks look cheap on valuation, but there are too many boats being built. Until investors get a better sense of industry capacity, and how far rates will come down before finding support, there won't be a sustained upturn in share prices; and it may take 12-24 months before these realizations are made.
Stephen Gengaro: I think the selling has been overdone, but in order to sustain a rebound, these companies will have to be able to post solid earnings, and day rates can't be hit too hard. My view is that we'll see rates stabilizing rather than making a notable downturn. As such, investor anxiety should subside, and they should begin taking a closer look at the group.
James Stone: In general, these stocks are oversold. However, without having any substantial visibility on the pricing front, it is unlikely they'll do anything for the next six months. Consequently, value investors are the only type they are apt to attract at this time.
Briefing: What are your earnings prospects for the industry for the remainder of the year?
Ken Sill: Earnings prospects for the remainder of the year should be pretty good as we expect they'll be up versus last year. The tougher test will be in 1999 as the current buildup in capacity will likely have a negative impact. Within the group, Seacor Smit will probably do better than most next year as they have reduced their exposure to the Gulf of Mexico supply boat market.
Stephen Gengaro: Year-over-year, we see earnings up 25% for many companies. In 1999, the industry growth rate will slow, and earnings expectations are likely to come down. When they do, we don't expect any significant upside surprises.
James Stone: For 1998, there shouldn't be much variance for actual results versus estimates. Beyond that, earnings will depend on the rate structure. Along with questions surrounding day rate pricing, the other wild card with respect to earnings will be the impact of repair maintenance costs and vessel downtime.
Briefing: Which stocks are you recommending and/or avoiding?
Ken Sill: Given its strong management, we have a long-term BUY on Seacor Smit (CKH). The other stock we follow is Tidewater (TDW), and we currently have a HOLD rating on it. Because of investor nervousness surrounding capacity issues, we just don't see much reason to throw a lot of money at the sector as it will be difficult near-term to make money in these stocks.
Stephen Gengaro: We have BUY ratings on Seacor Smit (CKH), Tidewater (TDW), and Trico Marine (TMAR). In the case of Seacor Smit, it has an excellent management team that is increasing shareholder value. Further, we have a HOLD rating on Hvide Marine (HMAR) as it has missed earnings in two of its last three quarters. Until Wall Street regains confidence in its ability to deliver with earnings, the stock is likely to tread water for the next several months.
James Stone: While there are no near-term catalysts to drive these stocks markedly higher, we have a long-term ACCUMULATE rating on Trico Marine (TMAR) as its valuations look very attractive.
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