Pivotal news for the OSX !
I hope no one fails to recognize the significance of a couple of news items today for the OSX ... especially those who just recently joined this Mo-Mo Train.
Per John Clarkes post; the Rig count finally has shown a bit of a reversal from a bottom here. However a trend has not been firmly established, but this increase in conjunction with GLM's comments of of receiving more bid requests is potentially the early signs of recovery.
Remember per RDC's Palmer, the magic number in the GOM is 150 Rigs must be working before dayrates can rise. We moved up 3 to 111 rigs working in the GOM Using 3 new Rigs going to work per week; we arrive at 150 GOM rigs by approx July 22nd - 13 weeks from today. Obviously this is a loose extrapolation, but bottomline - is in line with expectations of possibly Q3, but more likely Q4 showing the first results of a turnaround (higher dayrates/utilization & earnings).
The Street is obviously looking far forward - as numerous companies have virtually no earnings forecasted for fiscal 1999 - ie: ESV PTEN etc.However, the question is - how much higher valuations are they willing to assign to these shares - ''before'' the Oilpatch actually shows real fundamental improvement ? Another question here, is how do you go about picking your ''ponies'' here ? Do you ride with RIG - the still acknowledged pure Deepwater Play, with still - the highest contract coverage in the sector - and still selling at a cheap discount to its peer DO, with nearly a 50% higher eps for 1999 and still selling at a 40%discount to DO on a multiple of cash flow basis ? Is DO fully valued here ? Is RIG undervalued ? Or, do you go with the companies that will show the largest increase in earnings from today - the shallow water oriented jack up drillers, the land drillers, or the ultimate leverage play in the drilling universe - 'da Falconeddie ?
Perhaps, more importantly than even choosing one's ''mount'' here is timing an entry - exit, as to when to add additional shares, or when to take profits.
George Coles, post pointed out the warning from Yamanni - anyone who does not acknowledge that we are where we are Crude Oil pricewise - for the same reasons of where we were Crude Oil pricewise; are perhaps about to be severely humbled... As sure as we were fundamentally not deserving of $8 Oil - we may presently (untill we see proof of OPEC's new cuts) be underserving of $18 Oil.
This is not to say that the trend and the fundamentals make $18 unlikely, or unacheiveable - not at all; but merely that the reality is that not just moving through and beyond $18 Oil, but even maintaining $16-17 Oil is all in OPEC's hands and their compliance with their pledged new additional cuts. Ultimately, in reality; it is in the hands of the ''speculative'' Crude Oil Traders - keyword is ''speculative'' (Yamanni used the correct word). However, their reaction to the OPEC compliance numbers is very predictable - so the ball is in OPEC's court. Make no mistake about it - OPEC's compliance numbers will completely control Oilpatch stock prices in the short term.
IMHO, what Yamanni is saying between the lines; is that he is scared $hi!le$$ that compliance will be poor (not initially - but soon thereafter) and cheating highly probable with $18 crude oil. One had better factor in the initial reporting period of OPEC compliance and the ramifications of that report on shareprices ( that have made their most dramatic run in 30 years) against the backdrop of OPEC's past behavior and the need for OPEC maintaining cartel unity - vs. the individual greed of participants... the track record is not a good one. This is the same question the Street will be asking itself in determining if they sell into the good news/strength of the ''initial'' OPEC compliance report on May 10th.
IMHO, the OPEc compliance story will actually be quite complex. I would expect that the ''initial'' compliance will be satisfactory. I have said from the beginning that OPEC will not be shooting themselves in the foot if they fail, they will be shooting themselves in the head. There entire existance is riding on their initial compliance and they know it. Initial compliance is virtually guaranteed imho.
But, the ''initial'' compliance will ''not'' be the catalyst for either the Street, or the savy trader - the 2nd and 3rd compliance reports will be paramount. Only time will tell if the Crude Oil Traders gave OPEC too much - too quick ? There are struggling economies and market share issues that given OPEC's history make the expectations of continued compliance through 1999 less than a given - at these present price levels. I am probably not alone, wishing that we would have inched our way up through $15-16 here - as opposed to a virtual over-night spike to $18. This parabolic rise greatly increases the expectations for cheating in the nearterm - however, it is the best thing that could ever happen for traders as the volatility is dramatic here.
Given all of the above, more questions arise than answers.
Will we continue to see buying support as earnings season plays out here ? Were we more the beneficiary of the overall market shift to cyclicals in general, than actual specific nearterm support for the Oilpatch ? Will we see a sell off prior to the OPEC compliance reports due out May 10th - as the market has done so often prior to key API/EIA reports ? Or, is the Street all ready comfortable with OPEC's compliance being a reality and will they either, sell into the expected strength of good news, or will this good news be the catalyst to even more buying support and the first step of another solid leg above and beyond OSX 85 - 100 ?
Never, has balancing risk vs. reward, or having a plan been so important...
Bottomline for traders, we've had 4 cyclical trading ranges of OSX 45 - 72 ish just since September; will this be # 5 ? For buy & holders, you are now up potentially 50% if you were fortunate enough to ''nail'' the exact bottom. However you have seen virtually ''ALL" of your gains as reflected by the OSX index completely wiped out - all 4 times since September - you know what the $64 question is (VBG) !
For those who just jumped on the "Mo-Mo'' Train here, or made substantial additions of late - if you are not trading - read: taking profits, hold on .... only time will tell ...
Still lots of rotation ideas out there - the Techs & Internets were a gift opportunity to spin out of OSX profit taking and still a few E&P and Oil Service laggards still left. Is Profit Taking and Rotation'' still the game ? I think so. If it ''aint broke - don't fix it'' and something about ''Pigs get Fat - but Hogs get slaughtered'' rings home here...
Many Roads to the same destination - good luck and drive carefully.
... do not discount the dynamics of this:
<< Yamani warns of sharp drop in crude if OPEC compliance is not up to expectations.>>
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