From Offshore Drill Bits:
April 17, 1999
HOW DO YOU SPELL RELIEF? R O T A T I O N
Oil service sector investors were walking on clouds Friday.
The enthusiasm was contagious and widespread. The buyers just kept on
coming, pushing oil service stocks higher and higher in what was
likely one of the best days since the "boom" days of 1997. These are
the days the dyed-in-the-wool sector bulls dream of. The Oil Service
Index (OSX) was up a load-da-boat 9.4% to 72.04.
What got into buyers? After a fairly lackluster week, which included
one very "red" day, what triggered the BUY button on Friday?
For one thing, the spin on oil has turned 180 degrees. You can't read
a newspaper (do folks STILL read those things), or turn on the
satellite dish TV without hearing about oil prices shooting to the
sky. All of a sudden, almost overnight it seems, there is a
convergence of "reasons" for higher oil prices. To name a few
(contributed by K. Lingerfelt):1. OPEC production cuts.
2. Saudi Arabia announces it has actually complied with cuts.
3. Iran notifies Japan of more cuts in May.
4. Mexico declares force majuere, will comply.
5. Venezuela's new leader complies with former agreements.
6. Offshore and land rig use near and at historical lows. Can't find
it if you don't drill it.
7. Depletion, depletion, depletion -- is anyone listening?
8. Iraq has been overpumping, damaging oil field reservoirstructures.
9. Colombian terrorist activities impairing production.
10. Onshore wells shut-in, especially in US. Production lost.
11. NATO intervention in Kosovo, destroys fuel supplies. Createsworld turmoil.
12. US govt. (DOD) announces end of cost saving fuel stock depletion
and announces request for
144MM gallons of jet fuel. And now another large number of
planes to be deployed.13. IEA announces they have been overestimating supply and
underestimating demand.14. Korea growth phenomenal.
15. Japan finally turning around.
16. SUV sales skyrocketing. (I need a new one!)
17. Supertanker rates plummet due to lack of cargoes. (OPEC ain'tshipping.)
18. The occasional refinery explosion disrupts supply.
And those are just the headlines.Did I mention sector rotation?
Investors took a liking to a wide range of cyclical stocks this past
week. The oil service sector saw the first signs that it might get
some spillover by watching the action in Schlumberger (SLB). The
sector blue chipper started moving early Thursday in a prelude to
tacking on another four points on Friday. But wait.
Even though SLB tacked on four big ones on Friday, it gave it all back
but 3/16ths before leaving for the weekend. This lack of leadership
into the close may be a sign of weakness coming on Monday.
Will sector rotation carry the group higher? Maybe. Massive sector
moves can be strong and lasting. Such rotation can support oil stocks
until we get a peek at what OPEC is up to. Until then there are only
two variables to worry about, sort of. Earnings and fundamentals.
With earnings season in full bloom, sector investors have to hope that
disappointing reports won't spook the market. The Street will be
looking for any excuse to sell these stocks lower -- just like it did
earlier in the week with Rowan's shortfall. Don't look for any
positive surprises, and hope there aren't many (any) negativesurprises.
The other variable is fundamentals, but since there are no
expectations of business getting better for a quarter or two, it will
hard to hurt the stocks just because business is lousy. Don't expect
any fundamental improvements before we know about OPEC.
Here we sit with oil prices busting through $17, OPEC looking like The
Investors Friend, and 17 other reasons to love oil. I fear a vacuum
(of news) in the coming 2-3 weeks. Can investors sit still with
sector stocks without new news? Or, what will prompt anyone to buy
these stocks next week, and the week after?
It doesn't seem likely that oil will stick its head over $18 before
OPEC cheating levels are revealed. There won't be any reports of
better business or higher earnings.
The only thing I can see supporting or raising prices over the next
two weeks is sector rotation. Otherwise the shorts will be back in
the attack mode, having their way with the indefensible oil service
stocks. Again.**************************************
FLC MAKES ANOTHER TRIP TO THE WELL
All the gold may be in California, but the C A S H is in Houston.
Man! What would Mr. Drysdale do to get the bank account of R&B
Falcon? But even Jed Clampett and his brilliant playboy nephew Jethro
Bodine couldn't have done a better job than the boys at FLC in sweet
talking or otherwise cajoling such a massive amount of hard greenbacks
out of the pockets of so many Big Time money men. I am impressed!
Sure, it can be said they "gave away the store" to this last group of
"loan sharks". But what does it matter? If the leverage play of FLC
doesn't work, they won't have the money to pay back debt -- what does
it matter if there is another lender or two in the line after the cake
is all passed out? If the play DOES work, they can pay them all back
and live happily ever after.
Given enough time, the play WILL work. Never forget this is a
cyclical business and the most valuable asset a company can have is
time. Without enough time you die in the valley while trying to getto the peak.
The financiers who bought this preferred issue have cut one
extraordinary deal. Their 10.5 million warrants, that they won't even
own until next week, became "in the money" for a moment today. They
get 13-7/8 percent -- paid in more preferred stock, if you can imagine
that! -- and preference over common shareholders. I wonder what the
public markets would have paid for this incredible deal? And I bet
the buyers of the billion dollars of bonds a few weeks ago wish they
had their money back and could do this preferred deal.
Stay tuned to the continuing story of R&B Falcon -- there are many
more chapters left to be written.***************************************
REAL BIDNESS
While oil service sector investors go giddy on a day like Friday, the
boys in the patch get almost teary-eyed with joy when they hear news
like we heard out of Vastar this week.
Offshore Drilling Bits has been a long time fan of Vastar (VRI). In
fact, Vastar was one of the original ODB portfolio picks. This
company is hard at work doing the right things. They have put
together a no-nonsense Gulf of Mexico exploration and production
company and have a strong focus on deepwater.
Vastar is not playing rope-a-dope. They are in the ring buying
leases, drilling holes, and building for the future.
The recent and continuing oil company consolidation craze will put a
damper on drilling for a while for most companies. In the new
companies created by mergers no one knows who is allowed to spend
money. Lease and prospect inventories must be re-prioritized. Some
(many) leases will be sold, traded or farmed out to others. Simply --
They need time to get organized.
Not so at Vastar. They are kickin' you know what and taking names.
The threat to Vastar is if BP Amoco Arco (and heaven knows who else)
will decide to suck up the shares of Vastar not currently owned by
Arco. Arco owns over 80% of Vastar, but it's Vastar's independence
from Arco that has enabled Vastar to streamline and focus its
operations and strategy. Roll Vastar up into the BP Amoco Arco
behemoth and Vastar may go stale or lose its "pizzazz".
Vastar, and other E&P companies will benefit TODAY from higher oil
prices. If desired, they can sell their production, and anticipated
production, forward and lock in $17 oil today for years to come -- and
some may do just that. But it is the nature of the oil man to gamble.
Even the bean counters and suits that run oil companies these days
fancy themselves to be "oil men" in the tradition of J Paul (He who
drills the most wells find the most oil) Getty and other legendary
wildcatters who laid it on the line (usually using THEIR money
though). I suspect oil companies won't be doing a large amount of
forward selling.
Small oil companies are scrambling around like chickens with their
heads cut off trying to beg steal or borrow every dime they can find
to get hold of the "crumbs" falling off the giant consolidation table.
(You city folks may have never had the pleasure of acquiring a REALLY
fresh chicken in the manner noted above.)
These crumbs are not so crummy, and will be great drilling prospect
inventory for those that can collect a few. This will lead to more
customers for the oil service business, including the drillers. While
some reports say the driller's customer base is shrinking because of
consolidation in the patch, I say it is expanding.
These collectors of crumbs won't start drilling right away. They are
too busy raking in the inventory. After the floor is all swept and
the lease fallout from the Big Boys slacks off, that's when the
smaller and more efficient companies will get to drilling.
Of course there are always exceptions, as with Magnum Hunter. This
company has partnered with Tana to pick up an interest in an inventory
of ready-to-drill prospects which gives them a "unique opportunity" to
quickly deploy capital. The company said, "With drilling rates as low
as $12,000 to $15,000 per day, we hope to drill most of these
prospects in 1999 while this window of opportunity remains open."
Drilling contractors, you might pay a visit to Tana/Magnum. Sounds
like they could use a few shallow water jackups.
In the meantime, it's companies like Vastar that lead the way.More on Vastar:
From a short-term standpoint, it jumped through resistance to set a
new 52-week closing high on Friday with pretty good volume, (although
it is pretty lightly traded) after blowing out earnings by 73%. From a
long-term perspective, here are some things to think about:
1. While the did beat estimates, earnings were down, at 19 cents
(with average sales price of oil at $11.16) vs. 49 cents (with average
sales price of oil at $17.09). Factor in higher, or even today's, oil
prices and earnings move north, pronto.
2. Production increased 24%. The sixth straight quarter of production
increases. So if oil prices were at the same level as when Vastar made
49 cents in earnings, tack on another 24% in production and where does
that put earnings? I don't know where, but I know it's a lot higher!
3. Continued exploration success. This is the big one. Eleven of
Vastar's 14 exploratory wells decisioned during the first quarter of
1999 were successful, including the Mirage deepwater discovery on
Mississippi Canyon block 941 and two new field wildcat discoveries on
the Gulf of Mexico shelf.
4. They aren't sitting still. The company expanded its Gulf of
Mexico holdings by submitting apparent winning bids on 18 blocks at a
federal offshore lease sale. If all the blocks are subsequently
awarded, Vastar's portfolio will expand to 146 deepwater blocks and
407 shelf blocks. Drill 'em or lose 'em.
5. Due to exploration savvy, exploration expenses are falling. Dry
hole expenses in the first quarter were only $5.4 million, compared to
last year's first-quarter expenses of $27.0 million.
Bottom line? VRI looks to be on the right track and doing the right
things. This is an oil patch company to keep an eye on no matter what
type of investor you are. Support/Resistance = 47/55+.
*********************************************OIL SERVICE SECTOR FOCUS
Schlumberger (SLB) - SLB has been in an upward trend since the depths
of December, but renewed interest in the OSX stocks sent the sector
blue chipper sharply up early Thursday in what ended up to be a +4.00
day. SLB was up over 3 points Friday but fell precipitously during the
last 15 minutes of trading to finish the day up only three teenies.
That sort of weakness scares us a little, but maybe traders were just
locking in their profits at the last minute. Lots of stuff can happen
to the oil sector over a weekend. SLB reports earnings on Thursday and
analysts are calling for 0.31 compared to 0.67 last year. It's
whispered that they'll miss by a penny. Support/Resistance = 55.5/62
Rowan Companies, Inc. (RDC) - RDC reported losses of 0.12 a share on
Wednesday compared to expectations of -0.05. They got fined by
investors to the tune of better than 8% on the day, but then held
tough Thursday. RDC came back strong on Friday boosted by news from
Global Marine (GLM) that they recorded a record number of quarterly
bids during Q1 for its turnkey drilling-management services. This
helped RDC finish the week up better than a point. RDC might be a play
if it can clear the resistance at just over 14. Volume was up Friday
from Thursday, so look for continued interest in the sector before
setting an entry point. Support/Resistance = 12/14+.
Baker Hughes, Inc. (BHI) - Short-term Breakout! BHI has trended up
nicely since the beginning of March and definitely participated in the
oil rally this past week. It hasn't been in the current price
territory since last July and closing near the highs of the day both
Thursday and Friday with increasing volume bodes well for this stock
if there is continued interest in the cyclicals come Monday. BHI has
support at about 23.50 and is 9 months away from any resistance at the
37-43 level. There is room for this stock to continue up on a
short-term breakout.
Global Marine (GLM) GLM reported earnings on Thursday that beat
estimates by 0.02 Even with earnings so depressed, GLM is selling at
its lowest Price to Earnings ratio this decade. Consensus estimates
and company statements show earnings growth going forward. For our
purposes, GLM closed Friday right at a near-term resistance level.
Problem is, there was a weird run up on April 1, when the stock hit an
intraday high of 15 before closing well off that level. There are some
investors who got on the barge that day who will want off when the
stock regains that level, so we want to see it pop over 15 with some
volume before we would consider playing it. Support at around 11 and
again, there is nothing here if we see rotation away from the OSX.
*****************************************
Ever wish you could take back a decision?
On Jan. 29 we learned that Steve Silverman, the new manager of the
(loaded) Merrill Lynch Growth Fund, was cleaning house and dumping his
massive GLM holdings (along with other energy holdings his predecessor
had accumulated).Let's see how this change has served Mr. Silverman and the
shareholders in his fund: JAN 29 APR 16 RETURN
MAQRX 20.24 19.77 -2.3%GLM 8.50 12.81 +50.7%
I guess you can't get 'em ALL right.
Thanks to ODB reader "Heretic" for this contribution.
***************************************THE WORLD ACCORDING TO SLIDER
(Slider is a legendary Internet oil service sector "investor". I hope
you enjoy his views. If so, you won't be disappointed -- he has LOTSof views!)
Every single time we have seen this level of celebration we have been
hit with the cold slap of reality, every single time. What has
actually changed here since Wednesday when we sold off?
Yes, oil prices have has surged nicely - but who immediately benefits
from that? OSX stocks? - not immediately. In fact - maybe not for 2,
3, or even 4 quarters will strong crude prices generate any
fundamental change in rig utilization, dayrates, or earnings. But the
E&P's, Integrateds, refiners and International Oils do reap the
immediate rewards.
As such, I stand by selling OSX stocks continually into this strength
and rotating into the actual subsectors and stocks that reap the
immediate fundamental rewards of this move in crude prices.
While the Street will most definitely look forward in valuing the
Oilpatch, the recent earnings commentary from numerous CEO's has moved
the timeframe back at least 1 and possibly 2 quarters to Q4 '99 to
Q1-2 2000 before we see a dramatic change in fundamentals and
earnings. By any neutral measure, we have gotten a bit ahead ofourselves.
I feel that the short sellers will soon turn on the juice with a
vengeance as the buying and the short covering spike here will
subside. Perhaps many of the analysts who suggested a 15% retracement
being due here will be right - only it will be off of OSX 72 (thanks
to the cyclical rotation in the entire market) and not off of 64-66.
As such, OSX 60-62ish looks to be a reasonable support area.
While I agree that there is virtually no possibility of new lows, we
are fundamentally overvalued on a time/value basis in the drillers and
service stocks. Quite simply, the drillers and most service stocks are
more than a little ahead of themselves here. OSX 85ish is a reasonable
target, but we may just have to push back the time frame a quarter, or
two - until we see real change in utilization, dayrates and new
service/construction projects.
I'm not trying to spread gloom and doom, but momentum has to always be
measured against the stark reality of fundamental valuations. How many
times has "holding" and not taking some profits off the table resulted
in a near complete retracement, and paper loss off virtually all of a
rally's gains? The answer is all 4/5 times in the last 7 months!
Virtually every time! We obviously have NOT as yet had a run from OSX
45-50 to 70 that has stuck and NOT retraced back to the 50's, or less!
This one just may be the one that does stick - but for the 4th, or 5th
time - I will take profits off of the table and may get my 4th, or 5th
chance in 8 months to buy the sector at least 15-20% cheaper after
having done so.Until the fundamentals actually change - I stand by selling into
strength and playing the rolling trading ranges. |
