June 3, 1999
Dow Jones Newswires
DJ Oil Svcs Cos. Poised To Reap Rewards Of Higher Prices
By NICOLE RIDGWAY
NEW YORK -- Oil services companies are poised to tap the wallets of oil and gas companies, which are said to be gearing up to spend on exploration and other activities as improving commodity prices fatten their coffers.
On Thursday, some of Wall Street's most influential firms issued bullish outlooks for the oil services group, citing higher oil and gas prices, which suffered from a glut in supply and weakening global demand since 1997.
"Night follows day and stronger commodity prices are followed by stronger spending," Donaldson, Lufkin, & Jenrette analyst Arvind Sanger said.
Earlier, Goldman Sachs initiated coverage of the sector, urging investors to overweight their portfolios with the stocks. The firm noted that the commodity price upswing has boosted cash flows at many major oil companies, leaving them with money to burn and eyes toward expansion.
And most of that money will be spent on oil and gas fields, where oil service companies provide everything from exploration and production services to construction and engineering.
Anticipated increases in spending by oil companies have many industry analysts wondering exactly when those funds will find their way into the pockets of oil services companies.
"Generally speaking, you have to have decent commodity prices for at least six months before you start to see these oil companies spending more," Johnson Rice analyst Joe Agular said.
The analyst noted that an increase in spending of 15% or more by oil companies could fuel some "pretty rapid earnings growth" for oil service companies as early as in the third quarter of this year.
Agular said he expects companies in the sector to report earnings above analysts' current 1999 and 2000 earnings estimates, which he said were based "closer to the trough than...to the peak" of the industry's past performance.
Jeffrey Freedman, an analyst at Prudential Securities, said he believes oil services companies will see "material" earnings growth by the fourth quarter that will carry through into 2000.
His projections are in line with those of Goldman Sachs. Goldman gave the oil-services sector its biggest endorsement Thursday, saying services companies' revenues in 2000 will grow 14% to 16% while earnings-per-share will grow 40% to 50%. The projections are based on the belief that spending by oil companies will grow 10% or more.
That robust earnings growth should translate into higher stock prices for the group as well.
Year-to-date, stocks in the oil services group have risen 40% to 100% as oil and gas prices stabilized and recovered from their long slump. Despite those gains, Freedman believes stronger earnings will fuel a second wave of buying of oil services stocks.
"The cyclical bear market in the oil industry has ended and we are now entering a phase in the oil industry where levels of investment are going to improve," he said.
Agular agreed, noting that the cyclical nature of oil services stocks makes its important to invest with industry trends.
"The trend now is that you have hopefully seen the bottom and the industry fundamentals are starting to turn much more positive," he said.
In afternoon trading, shares of industry giant Schlumberger Ltd. (SLB) changed hands at 61 1/16, up nearly 2%.
Halliburton Co. (HAL) rose a stealthy 4% to 43 3/16.
And Hanover Compressor Co. (HC) stock price gained 6%, to 28 1/2.
-Nicole Ridgway; 201-938-5174
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