Big Dog: thanks much for that excellent article. Hope your don't mind I posted the complete version here.
investorama.com
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The Wild Ride of Offshore Driller Stocks
by Mike Simmons
March 27, 1999
It's been a wild ride for the stocks of the offshore drillers during the past week. Where from here? What are the risks going forward?
Let's take a step back an have a look.
The deadest dog on Wall Street, long ago tossed aside for the glitzy world of dot com and high tech stocks, has put on a command performance during the month of March.
The numbers are stunning.
The Oil Service Index (OSX), comprised of 15 of the best known names across the sector, has vaulted from an all time low of 47.40 on March 1, to Friday's close of 68.12 -- a move of 43.7% in a mere 20 trading days.
The price of oil, the mostly widely used (and politically abused) commodity on Earth, has soared from $12.35 to $16.17 during the same 20 trading days -- an increase of 30.9%.
Out of a dozen offshore drillers, eight are up 35% or more during March alone. The driller leading the pack may be a surprise -- Atwood (ATW), up an eye-popping 62%. Dain Rauscher says Atwood is under-followed on Wall Street, and has the largest upside percentage gain potential of the drillers.
Even the driller with the least gain for March was up a comfortable 27% -- Diamond Offshore.
Here is a list of the dozen drillers and their stock price gain from March 1 to March 26:
Atwood 62%
Nabors 45%
Marine Drilling 45%
Global Marine 42%
Ensco 41%
R&B Falcon 37%
Noble Drilling 36%
Parker Drilling 34%
Rowan Companies 31%
Transocean 31%
Santa Fe 28%
Diamond Offshore 27%
Not a bad month. Will April be a repeat of this performance? It'll be tough.
It's no secret what made the stock prices of the drillers post such impressive gains. Higher oil prices. Ok, so now oil prices are higher. Nothing else has changed. A few immediate, but minor, production cuts were implemented, but the majority of the promised cuts take effect next week.
Demand estimates are improving. There is renewed talk of depletion (producing oil and gas reserves faster than replacement reserves can be found). Oil companies are raising gasoline prices like crazy. (Their profit margins must be sky high since they are selling gasoline refined from that $11 oil they stored in every nook and cranny that wouldn't leak. Remember the excess inventory?)
And most important, OPEC isn't cheating yet. The big question is how much will they cheat and when will the investing public start to hear about cheating? As sure as night follows day, the day will come when Bloomberg puts out a news report sporting a headline such as, "OPEC Cheating On Cuts, Oil Prices Set To Plunge." The spin doctors of the world will proclaim the end of "high" oil prices. But again, nothing will have changed. OPEC always cheats. And everyone knows it. Including OPEC.
Pity the driller stocks that have struggled so hard over the past months to "get some respect." When the oil-price-plunge spin comes you can put minus signs on the numbers listed above.
That is the near-term risk of this market sector. The fundamentals of depletion and increased oil/gas demand will support the fortunes of oil service companies over the longer term. But for now the stock of these companies are at the mercy of the spin machines of every interest group that has a mouthpiece to the investing world.
It is not reasonable to think OPEC will live up to Wall Street's expectations that have been priced into the driller stocks. It is almost a certainty those expectations won't be met and stock prices will suffer a set back.
It is not reasonable to think the driller stocks will duplicate such lofty March gains again next month without the support of increased rig utilization. To date, there is not a hint of higher rig use rates, nor higher charter rates.
The prudent course in this "Environment of Spin" may be to set stop loss limits on driller stocks and be willing to cut and run in the face of a sell off. The limits can be adjusted upward as prices move higher. This practice will protect gains from being lost as quickly as they were made.
It is reasonable to expect volatility in the driller stocks over the next 2-3 months with numerous opportunities to buy back in if you are stopped out while protecting gains. There will always be another bus come by.
A recent MSN article said a good way to "play" the oil service stocks is by using a form of laddering, as bond investors will recognize. Maturities of bonds are typically "laddered" to diversify interest rate risk. This is done by buying spreading out maturity dates of bond holdings.
Within the oil service sector, it may be possible to ladder "quality". The idea is that money will first flow to the higher quality stocks and these stocks will be the best supported. After a continuation of the uptrend in the sector, money will start to be attracted to the lower tier issues.
If this holds true, an investor can roll his money out of the higher quality issues and buy the next lower tier as the upturn continues. Eventually the lowest quality issues will catch the ride and move higher.
The problem becomes defining what is "quality" -- maybe larger capitalization? (In my mind they are all quality stocks if oil prices are up and moving higher.)
Don't let the gains of March make you feel bulletproof. And never ever be afraid of taking a profit.
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About the Author
Mike Simmons is an offshore rig broker and consultant, and the publisher and editor of Offshore Drilling Bits. Offshore Drilling Bits is the only e-newsletter covering the offshore drilling industry. For a free subscription, visit the Offshore Drilling Bits web site. Comments and questions are welcome.
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