Ahmed:
Just wanted to say again how much we all appreciate your excellent technical anlysis. Your forecasts have been the best of anyone on this thread. Nuce to have you in the (still) bullish camp.
BUSINESS WEEK now pushing energy stocks. Just a few months ago they were talking about oil staying low forever
BUSINESSWEEK ONLINE: DAILY BRIEFING
BW ONLINE DAILY BRIEFING
YOUR MONEY by Robert Barker
April 16, 1999
The Oil Patch Should Be Catnip to
Contrarians
Last year's sorriest sector is now where the value is.
Here's where to start drilling
With the price of oil up more than 50% since December, you may be
wondering: Has the time come at last to buy energy stocks?
Sorry, I can't tell you whether the Organization of Petroleum
Exporting Countries' recent move to buoy oil's price will keep
working. And many of the oil and oil-service companies reporting
first-quarter earnings over the next few weeks likely will disappoint
investors looking for immediate gratification.
Just the same, there's no question that energy stocks, the single
sorriest market sector over the past year, are where the value is. If
you've ever felt a contrarian impulse, you've got to look in the oil
patch. That's why this week, I fired up my copy of the Value Line
Investment Survey for Windows to see whether I could pinpoint a
few companies worth your further research.
Happily, I found a few good prospects among the oil-service group.
But before you click here ("Solid Citizens of the Suffering Oil Patch")
to see a table with names and vital stats, please allow me quickly to
explain how they found their way to the list. The Value Line database
includes 243 oil-related stocks, including producers, refiners, service
outfits, and integrated companies. None, I should note, won better
than a middle ranking from Value Line for timeliness. Take that as
another yellow flag: Exploring at these depths is a study in
contrarianism.
DEEP-WATER DRILLING. Persisting nonetheless, I filtered
out foreign stocks (to avoid currency risk) and small fry of less than
$1 billion in market value. That left a group of 43, from which I
trimmed another nine names by demanding a net profit in the most
recently reported quarter, ended December. Finally, I ranked the 32
finalists by their return on capital over the latest 12 months and
focused on the top five. My theory: If these companies were able to
manage a 15%-or-better return on capital amid a most dismal 1998,
then they're a good bet to shine when oil prices see better days.
At the top of the list is Tidewater (TDW, $25.06), the New
Orleans-based operator of the world's largest fleet of vessels servicing
offshore oil and gas drillers. Although it does business around the
globe, lower demand from exploration companies operating in the
Gulf of Mexico especially crimped earnings. Through the nine months
ended in December, earnings per share dwindled 6.8%, to $2.75.
Sales over the past 12 months totaled $1.05 billion.
Diamond Offshore Drilling (DO, $29.81), majority-owned by the
Tisch family's investment vehicle, Loews Corp. (LTR, $74.31), runs
rigs for oil and gas explorers and specializes in the tricky work of
deep-water drilling. Last year, Diamond Offshore saw earnings jump
38%, to $2.66 a share, on revenues of $1.2 billion. But the
consensus among Wall Street analysts is for earnings this year to fall
sharply, to $1.55 a share.
McDermott International (MDR, $27.38) is more diversified, with
operations also in steam generation and environmental gear for electric
power plants, fuel and parts for the U.S. Navy's nuclear-powered
fleet, engineering, and construction of onshore oil- and
gas-processing plants. But it is McDermott's offshore oil-service
segment that has been responsible for more than half its $3.3 billion in
revenue and nearly that share of operating profit. Like the others,
lower demand for oil services is hurting profits: In its most-recently
reported quarter, ended Dec. 31, earnings sank 13.4%, to 71 cents a
share.
TRIMMING JOBS. Under former Secretary of Defense Richard
Cheney, Halliburton (HAL, $37.69) last fall became the clearly
dominant oil-service company, a $17.4 billion-in-sales giant after its
merger with Dresser Industries. With the industry hurting, of course,
that didn't really help business: Profit in the final quarter last year
plunged to 15 cents a share from 58 cents in the year-earlier quarter.
To cut costs, Halliburton Chief Executive Cheney has reduced his
workforce by 9,000 and expects to trim another 1,850 jobs.
Cooper Cameron (CAM, $30.94), which likewise saw its
fourth-quarter net fall, to 49 cents a share from 83 cents the year
before, collects $1.9 billion on sales of such oil-rig gear as valves, air
compressors, and turbines. When drilling picks up -– as it may if oil
prices stabilize at the new, higher levels -- Cooper Cameron's
fortunes figure to improve noticeably.
The case is the same for each of these five companies. If higher oil
prices do lead to higher demand for oil serivces, will these stocks
zoom the way the next five dot-com IPOs threaten to? Unlikely. But
these companies have other qualities that may appeal to discriminating
minds: Each boasts a strong business position, each enjoys strong
cash flows, each save Cooper pays a dividend, each trades with good
liquidity on the New York Stock Exchange, and each, despite perhaps
the roughest business conditions since World War II, is actually
returning to shareholders a little thing called profit.
Barker covers personal finance for Business Week from Melbourne
Beach, Fla.
EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _
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