IN THE NEWS / U.S. Oil Services Earnings Seen Receding
U.S.-based drilling contractors and oilfield service companies are expected to report lower quarterly earnings in the coming weeks as the year-old slump in oil prices finally filters through to their bottom lines.
Up to the second quarter of this year, many drillers and service companies were still posting higher profits. By the third quarter, however, the impact of reduced spending by their customers in the energy exploration and production business was taking its toll.
"Generally you're going to be seeing companies reporting pretty sharp year-over-year declines in earnings," said James Stone, an analyst who covers the sector for Schroder & Co.
In addition to the wider malaise in oil and gas, third-quarter results of companies with substantial operations in the Gulf of Mexico are likely to have been held back by storms and hurricanes, which severely curtailed operations in that region in September.
Several service companies, such as Cooper Cameron Corp. <RON.N> and Baker Hughes Inc.<BHI.N>, issued warnings last month that their earnings would fall short of Wall Street's expectations.
Baker Hughes and BJ Services Co. <BJS.N> both announced big cuts in their work forces in a bid to reduce their costs and at least partially offset the deterioration in market conditions.
Simmons & Co. analyst Roger Read said the larger oilfield service providers would typically report year-on-year earnings declines of 10 percent to 15 percent for the September quarter while the drop could amount to 30 percent to 40 percent for drillers.
Analysts foresee at least two more quarters of flat or deteriorating earnings for oil service companies and drilling contractors, but most believe a recovery is not far away.
"We would expect either in the second or the third quarter of next year that activity will start to improve and that you would see earnings improve along with that. Somewhere next summer is where we expect to see the upturn," Read said.
Expectations of recovery are based on the assumption that supply and demand for oil will achieve more balance by mid-1999, allowing prices to stabilize at higher levels.
They also assume that the economic crisis in Asia and emerging markets does not develop into a global recession.
Analysts note that oilfield service stocks have fallen sharply since last autumn, mirroring the decline in crude oil prices and moving well ahead of the decline in sector earnings.
The Philadelphia Stock Exchange oil services index<.OSX> has fallen more than 55 percent in the year to date, compared with a rise of 2.8 percent for the Standard & Poor's 500 index.
Many analysts argue this steep descent has brought oil service stocks to a level at which the risk of further losses is far outweighed by the prospect of substantial gains in anticipation of a change in the sector's fortunes next year.
"We don't see a lot of downside risk left here. ... Valuations appear to be very attractive, even on reasonably conservative estimates of profits and cash flow for 1999," said Stone.
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