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Friday October 16, 12:49 am Eastern Time
Most offshore drilling firms' earnings fall,
but stocks rally
By Andrew Kelly
HOUSTON, Oct 15 (Reuters) - Most offshore oil drillers reported lower
earnings this week and warned that things will probably get worse before
they get better.
Nevertheless, their stocks surged on Thursday, outpacing a broader market
rally amid a growing feeling that drilling stocks might have bottomed out after a long, brutal sell-off.
The Philadelphia Stock Exchange's OSX index of oil service and drilling stocks gained 9.5 percent to 54.67 on the day,
while the S&P 500 index rose 4.2 percent to 1,047.49.
The stock of individual drillers such as Global Marine Inc.(NYSE:GLM - news), land driller Nabors Industries,
Inc.(AMEX:NBR - news) and Diamond Offshore Drilling Inc.(NYSE:DO - news) did even better on Thursday with
gains of 10.5 percent, 15.3 percent and 16.3 percent, respectively.
On Thursday, Global Marine's stock rose $1.00 to $10.50 a share, while Diamond Offshore's stock added $3.44 to
$24.50 a share, both in composite New York Stock Exchange trading.
Nabors Industries' stock gained $2.125 to $16 a share in trading Thursday on the American Stock Exchange. Nabors
Industries is expected to report third-quarter results next week.
And Ensco International Inc.'s (NYSE:ESV - news) stock went up 75 cents to $10.25 a share, a gain of 7.8 percent from
Wednesday's close, in composite NYSE trading.
After falling more than 50 percent in the first nine months of the year, mirroring a steep drop in global oil prices, the
OSX index hit a low around 47 in late September and appeared to be testing support around that level again late last
week.
''We think we know where the bottom is now,'' said Mark Urness, an analyst with Salomon Smith Barney.
Urness said there was great uncertainty about the outlook for the sector and that a recovery in oil prices would take a long
time to translate into increased demand for drillers' services.
Many analysts believe, however, that the long slide in drillers' stock prices has brought them to a level at which the risk
of further losses is far outweighed by potential gains.
Most agree that a rally in drilling stocks will occur before their earnings start to recover, just as their descent anticipated
the downturn in their earnings.
''The stocks will move ahead of the pick-up in (drilling) activity,'' said Urness.
Investors looking to drilling companies for bullish signals this week would have been disappointed, however.
Global Marine on Wednesday reported a 40 percent drop in third-quarter net income to $47.2 million, or 27 cents per
diluted share, from $78.4 million, or 44 cents a share, in the year-ago quarter. The Houston-based offshore contract
driller said the utilization rate for its fleet of drilling rigs fell to 93 percent from 99 percent in the same period of 1997.
Ensco International of Dallas said on Thursday that its third-quarter net income fell to $59 million, including a one-time
gain of $6.5 million, or 42 cents per diluted share, from $67.8 million, or 47 cents per diluted share, in the same period a
year ago. The gain, which was five cents per diluted share, net of tax, came from insurance proceeds on the loss of the
ENSCO Kodiak II, a large anchor-handling tug-supply vessel.
Average daily rental rates for ENSCO's fleet of drilling rigs, operating mainly in shallow waters, fell to $51,600 from
$55,800, while the fleet utilization rate fell to 86 percent, excluding shipyard downtime for upgrades, from 95 percent a
year ago.
''Average dayrates for our equipment will likely continue to trend lower over the next few quarters and further erosion of
utilization is possible,'' said Carl Thorne, chairman and chief executive officer.
Diamond Offshore, however, reported a 40 percent increase in third-quarter net income to $108.7 million, or 75 cents per
diluted share, on Thursday, reflecting the fact that most of its rigs operated at rates negotiated long before rig rates turned
weaker. In the year-ago third quarter, the Houston-based company earned $77.8 million, or 54 cents per diluted share.
Diamond Offshore's President Larry Dickerson said earnings would be lower in the fourth quarter, with shallow-water
jack-up rigs that had been earning $40,000 a day in the Gulf of Mexico having to bid for work at current market rates of
around $20,000 or less.
Dickerson said Diamond Offshore currently had five jack-ups ''stacked'' in the Gulf of Mexico awaiting work and had
also withdrawn two semi-submersible rigs from service there.
''We don't think there's sufficient demand to
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