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Bull Run: Oil Services and Drillers Driving Higher
By Mavis Scanlon
Staff Reporter
10/21/97 9:58 AM ET
The oil and oilfield sector opened the week on a powerful note, making some wonder if the group was prepared to make another strong upward move in the market.
Schlumberger (SLB:NYSE) illustrated the powerful gains in the sector Monday, gaining 5% to 89 7/8 after reporting stronger-than-expected earnings on Friday. But even as Schlumberger lumbered higher, some funds showed willingness to sell into the strength. Despite hints that some of the early winners in the sector were booking gains, several investment professionals said several companies in the oil sector -- deep water and land-drillers, equipment manufacturers, and subsea parts and service suppliers are at or near the beginning of their cycles.
"We still like the sector very much," said Nikos Monoyios, Vice President of Equity Securites at the Guardian Life Insurance Company, which manages the Guardian Park Avenue fund. Monoyios said they are still very much overweighted in the sector. "Earnings for the most part have been very good -- one of the few sectors in the market that has very good earnings. The important thing is earnings are increasing and exceeding expectations. I think the visibility of earnings for this group over the next two years is the best in the stock market today."
Schlumberger provided a strong example of that earnings power. For the fifth consecutive quarter, the world's largest oilfield services company exceeded expectations, reporting net income of $356.6 million, or 72 cents a share, up 56% from the net income of $228.9 million and 47 cents a share reported a year earlier. That report helped reverse the selling pressures seen early last week.
"What we saw last week was more of a price-driven correction," said Kurt Halleard, an analyst at Cambridge Investments Inc., a San-Francisco based hedge fund. Halleard said Cambridge took advantage of the dips, adding to positions the fund is trying to build. Though Halleard declined to discuss specific purchases, he did say the firms larger positions were in Ensco (ESV:NYSE) and Nabors (NBR:NYSE). He also likes Freide Goldman International (FGII:Nasdaq), an equipment manufacturer, and Cooper-Cameron (RON:NYSE), which supplies subsea parts and service.
On Monday, those stocks all performed well. Nabors gained 5% to 43 7/8, Freide Goldman International added 11% to 34 1/2, Cooper Cameron was up 3% to 73 15/16, and Ensco rose 2% to 43 1/8.
The fundamentals of companies like Nabors and Patterson Energy (PTEN:Nasdaq), another land-driller, are playing out now like their deep-sea drilling counterparts played out two years ago, said Mike Carver, an analyst at WPG Farber Partners, a New York City based hedge fund. (Patterson was up 7% to 54 1/4 on Monday.)
Day rates for land drilling rigs, a crucial barometer for the sector, move around on a weekly or monthly basis. That kind of volatility lends itself to upside surprises in this environment, Carver said. He hesitated to talk specific numbers for replacement rates due to the numerous rig/contract combinations in the sector, but he said rates for land rigs need to go up another 50% before new rig construction takes place. He noted that the 42 rigs presently being built or refurbished (according to a recent report released by Southcoast Capital) are rigs that are already contracted out for business, and if construction or refurbishment takes, say, two years, "you're really not talking about new [rig] supply until five or seven years out."
In deep water there is a similar supply story. Diamond Offshore (DO:NYSE) announced last week it received a letter of intent from BP Exploration for a five-year, $320 million drilling contract in the deep water of the Gulf of Mexico. That translates to a day rate of $175,000. DO was up 2% to 61 3/8 on Monday. Global Marine (GLM:NYSE) also announced a "bridging" contract with Belfast-based Harland & Wolff shipyard for a $300 million deep-water drillship for delivery in late 1999. Global was up 3% to 34 1/8 on Monday. A full construction contract, including engineering specifications and pricing, is expected to be signed by December 1, according to the Gulf of Mexico newsletter.
Diamond and Global would not be taking on these projects without contracts, said Carver. "That's a great rate," he said, describing the DO deal. "If the contract were for a shorter duration maybe it would have been higher. Diamond has diminished the level of risk -- they'll get their money back on that rig. Getting a five-year contract is terrific. That piece of new capacity will be back on the market again in seven years."
It's companies such as Global Marine, McDermott, (JRM:NYSE) and Stolt Comex (SCSWF:Nasdaq) -- companies that are "levered towards infrasctructure" as Carver said - that WPG Farber is buying these days. Monoyios of Guardian likes the offshore drillers, "especially the ones that are involved in deep-water drilling, like Transocean (RIG:NYSE) and Diamond, land-drillers like Nabors, and the companies that make equipment and upgrade rigs, like National Oilwell (NOI:NYSE) and Friede Goldman.
On Monday, Stolt Comex dropped 1% to 63 1/4, McDermott lost 0.25% to 47 3/8, Transocean gained 5.6% to 56 7/16 and National Oilwell gained 7% to 77 11/16.
WPG also likes Maverick Tube (MAVK:Nasdaq). The maker of oil pipeline and well equipment reported net income of $5.4 million, or 35 cents a share on Monday, up sharply from the net income of $2.9 million, or 19 cents a share, it reported a year earlier. The company finished little changed in Monday trade.
"The cycle is one that will last for many years," Carver said. "If you are focusing on this quarter and next quarter you're really missing the big picture. You probably have till 1999 and some of these companies have till beyond that." <Picture>
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