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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: marc chatman who wrote (23414)6/4/1998 2:25:00 PM
From: Czechsinthemail  Read Replies (2) of 95453
 
Baird, when you talk about the rise and fall of oil prices and the uneven impact on the companies in the sector, are you talking about the short term impact on the stock prices, or the impact on earnings (which may not show up so quickly)?

Both. The price movement is likely to be rapid in anticipation of impact on dayrates from a stronger oil price environment. The joker however is confidence in higher dayrates and higher earnings. I think the confidence is likely to remain with the companies with relatively higher deepwater exposure -- RIG, DO, ATW, FLC, NE, etc. even though the eventual impact on earnings may be higher for shallow drillers like ESV. The recent Smart Money article on Marine Drilling compared the impact on earnings if oil prices remained at current levels into the future. It showed MDCO increasing due to its deepwater exposure while ESV dropped slightly. I think the deep drillers and mixed deep/shallow will likely outperform unless/until there is enough increase in oil prices to create a much more bullish view on oil prices and drilling.
A lot of people have been betting on the service companies as more stable and predictable alternatives to the drillers. This may be true unless it turns out they have been expanding capacity to increase supply while drilling demand remains relatively flat. Meanwhile most have higher PE's than the drillers that I think may temper their upside potential. It is the problem with PEG analysis -- it is only as good as the future earnings assumptions. I think both drillers and service companies will announce 2Q earnings that further reduce their already ridiculously low PE's.
Baird
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