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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (15392)	9/5/2002 10:27:59 PM
From: Spekulatius	Read Replies (3) \| Respond to of 78487

Oil service stock discussion I have been looking at oils service stocks from time to time. They never seem to be an extremely good value and I am the first to admit that right now they don't seem to fit in most value criteria either. However they are tremendous cyclical plays and at multi-year lows and with the current healthy oil prices, they are well worth a look, IMO. Looking at Oil service from a value perspective, i think that the P/E ratio does not provide an adequate measure. The reason for this is that the earning quality differs quite a bit from company to company, depending on what depreciation rates is being used for the equipment. For a capital intense business like Oil service, the depreciation is a very significant expense. I have created a small spreadsheet to illustrate this. Since I believe that similar company own similar equipment, the depreciation rates for oilservice company's should be similar, but they are not: DO RIG GSF(2002*) NBR Revenue (mil$) 885 2820 2000 2225 Net assets (mil$) 2002 8368 4002 2433 Depreciation (mil$) 186 621 254 190 Depreciation time 10.7 13.8 15.8 12.8 Rev/net assets 0.44 0.34 0.50 0.91 Gross margin 49.30% 43% 34.00% 41.71% As it turns out, DO has the most aggresive depreciation (they write of their equipment in 10.7 years average) with GSF being much less conservative (15.8 years). Since DO has been doing so for years, their equipment is undervalued on the balance sheet, so they should be able to achieve higher gross margins a better Revenue/net assets ratio and better return on net assets - as it turns out the spreadsheet sort of confirms this. NBR sort of stands out with a very high Rev/net asset ratio but in my opinion this is because they are mainly land driller rather than deep water driller. Land driller is a mature business, uses simple equipment, is probably more cyclical and has lower gross margins. This is why I am not interested in NBR as an investment (it might be a good speculation though). I believe that DO is the best company amongst the drillers also because of other factors, like anticylical investment strategy (they upgrade their rigs when they are idle and can afford to do so, because of their very health balance sheet). Well i hoped i made some valid points here, i would very much like to see other points of view!