Ron, Big Dog's lovely pal Mavis is not optimistic about OS.
Unfortunately, what she has to say makes a lot of sense and
appears to be a well-thought-out analysis of a rather
"bleak short-term outlook". We need to get some dot.coms on
the end of these company names.<g>
John
Top Stories: Oil-Service Earnings Estimates Fall Further
By Mavis Scanlon
Staff Reporter
11/24/98 10:07 AM ET
Look out below.
An early fourth-quarter surge in the oil-service group has faded, giving way
to additional declines in crude-oil prices and a bleak short-term outlook in
international drilling activity. And more earnings-estimate reductions are
following.
Expectations of pricing wars in key oilfield services such as drilling,
seismic-data acquisition, directional drilling and pressure pumping of more
mature wells are leading to the 1999 earnings-estimate cuts. And some
analysts say there is no reason to believe the most recent cuts will be the
last.
"My numbers are among the lowest, if not the lowest, on the Street," says
Wes Maat, who follows the group at Deutsche Bank Securities in New
York. But with too much capacity chasing too little work, Maat says he has
no confidence that his numbers will hold.
"The fourth quarter just isn't showing the strength the group had hoped
[for]," says Ed Perks, a portfolio manager and analyst at the Franklin
Templeton Group in San Francisco. "People were not expecting crude to
be down this low." The U.S. price for crude oil closed at $12.46 a barrel
Monday.
While oil prices could get a boost on any news out of Iraq (on Friday, arms
inspections were halted once again when Saddam Hussein balked at
handing over weapons-related documents), major economic issues
affecting oil demand will significantly influence the oil-service group over
the next year, Perks says. These issues include the performance of
economies in Asia and Latin America, OPEC's compliance with
production-reduction goals, the outcome of this week's annual OPEC
meeting and the production output of non-OPEC oil producers.
Company-wise, lower levels of North American and international drilling
activity have contributed to recent earnings reductions. Rowan Cos.
(RDC:NYSE), for example, which refuses to operate rigs working below
operating costs, has nine of its 14 jackup rigs in the Gulf of Mexico idle.
Lewis Kreps, who follows Rowan at Dain Rauscher Wessels in Dallas, has
cut his fourth-quarter estimate to 10 cents from 20 cents and cut his 1999
earnings forecast to $1.10 from $1.60. The First Call consensus estimate is
for Rowan to earn 16 cents in the fourth quarter and $1.19 in 1999. He
rates Rowan a buy; Dain has not performed underwriting for Rowan.
Also at risk for further estimates cuts are the mid-cap service providers such
as BJ Services (BJS:NYSE) and Varco (VRC:NYSE). BJS continues to
see levels of activity fall, especially in Canada, says Jim Wicklund, who
follows BJS at Dain. "Activity continues to fall, and when activity falls, so
does pricing," Wicklund says. He has a strong buy rating on BJS; Dain has
performed underwriting for BJS.
In the first half of next year, weak oil prices will lead to significantly
reduced drilling activity in two key international areas, says Maat at
Deutsche Bank. "To date, most of the decline in the non-North American
rig count has been focused in Latin America and Africa," he wrote in a
recent report. "However, we believe that continued weak oil prices in 1999
will materially impact rig activities in the North Sea and the Middle East --
markets that have been high oil-service revenue generators for rig and
equipment and service providers."
"As oil prices continue to fester, there will be a breakdown in these key
markets," he adds. After peaking in January, the rig count outside North
America has declined by 87 rigs, or 11%. There are currently 732 rigs
working outside of North America. In 1993 and 1994, the last time oil was
below $15 a barrel, there were 754 rigs working.
Throughout 1998, pricing for important services, such as pressure pumping
and seismic-data acquisition, has been weak but has not plunged. Industry
consolidation has helped. But in 1999, Maat sees the world's rig count
falling further, increasing the chances of price wars, which squeeze
margins.
To be sure, with pessimism pervading the market, it could be the right time
to look at the group. Perks at Franklin Templeton says valuations include a
long-term industry slowdown he doesn't see. "Even though the next six to
nine months are unclear," he says, "deep-water drillers and offshore
construction plays are areas we like over the next two to three years."
Wicklund at Dain says he is most afraid that the group will be dead money
for a while. "I think [the group is] going to trade sideways and sit there," he
says. Drilling budgets, levels of activity and the weather are just a few of
the uncertainties.
Maat at Deutsche Bank is much less sanguine. He says the group can retest
the 52-week lows seen in August and September. "There are 1,600 rigs
working in the world," he says, and historically, the "sector has bottomed at
1,500 rigs working. If that relationship holds, then names in the group
could be down 25 to 40%." |
