To All:
This interesting article appeared in the TheStreet.com earlier today.
Enjoy!
Top Stories: Drillers Trying to Rediscover the Bullish Road
By Mavis Scanlon
Staff Reporter
12/4/97 7:41 PM ET
The bulls may be taking over once again, but the struggle for control among the oil
services and drilling stocks remains intense. A sharp selloff in the group Monday has the
driller bulls feeling wounded. But recent developments are starting to bring modest
optimism to the battered sector. Among them: a recently completed offering, some
upgrades and reports of renewed institutional interest.
"I was buying aggressively this week," says Eric Gustafson,
whose $640 million Stein Roe Growth Stock Fund has about 10% of its weight in
oil-service stocks. "The selling was vicious, it was brutal, it was trading-oriented. It was a
lot of the hedge fund boys getting out -- they wanted to preserve the year, " he says.
Gustafson says he added aggressively to his position in EVI (EVI:NYSE), which closed
under 50 both Monday and Tuesday. EVI finished trading Thursday at 49 9/16.
This week's bullish indicators seem to be outweighing the negative psychological factors
that have plagued the sector since the Dow slid 554 points on Gray Monday. Though
fundamentals remained solid throughout the fourth quarter and earnings outlooks for 1998
are strong, investors have become nervous about El Nino, OPEC's increased level of
production and a proliferation of offerings.
As recently as Monday, Trico Marine Services (TMAR:Nasdaq) considered shelving an
offering of 4.8 million shares of common stock until after Christmas. But Trico managed
to muscle its offering through on Thursday and it will use proceeds to help pay down debt
related to its
acquisition of Seavik Supply ASA.
But nothing's easy among the drillers these days. Trico's offering was reduced to 4
million shares from the intended 4.8 million. At $28 a share, the offering will garner the
company $112 million, rather that the $176.8 million they hoped to gain when they filed
the registration in October, when their stock was trading around 37. On Thursday Trico
closed at 29 1/8. "Is it painful selling the stock at this price? Yes it is, when we feel the
company is worth so much more," says Tom
Green, a senior financial analyst at Trico. "But we really felt
like we needed to get equity on our balance sheets."
Also bolstering the sector are upside earnings revisions by UBS analyst Wes Maat. He
upped his fiscal 1998 earnings estimates on Dresser Industries (DI:NYSE) to $2.25 from
$2.20, and his target price to 45. Dresser closed at 40 11/16 Thursday. Maat also noted
that a five-year contract Ensco International (ESV:NYSE) just signed with Chevron to
provide drilling services in Venezuela will up the driller's cash flow and earnings per
share in 1999.
Nikos Monoyios, co-manager of the Guardian Park Avenue fund sees the recent
negativity in the drilling and service sectors more as a reflection of what is happening in
the stock market rather than what is happening in the industry. In general, he says, he
has not changed his outlook on the sector. He believes that from an operating standpoint,
most of these stocks still have very good prospects. "We have increased rather than
reduced our exposure," he says. He declined to discuss specific stocks, but mentioned
Canadian oil and gas producers as an attractive group with good growth prospects.
Analyst Jim Wicklund at Rauscher Pierce Refsnes attributed the recent selloff and the
hostility toward the sector to seasonal factors. "The psychology at this time of the year is
always negative," he says. On a statistical basis stocks typically weaken at this time of
year. A model at Rauscher shows stocks bottoming out at the end of November.
"The problem comes from the psychological point of view of investors. They may think
there is something endemically wrong with the sector," which they are not seeing, he
says. But exploration spending is up 17% for the year, he says, and even though the
sector is up less than it was in September, his buy list -- which includes Atwood
Oceanics (ATW:NYSE) Marine Drilling Company (MDCO:Nasdaq) and Rowan Co.
(RDC:NYSE) -- is up 53% for the year.
But it's not all wine and roses yet. In the midst of the sector's downturn, one company
has pulled a stock offering. A group of shareholders in National Oilwell (NOI:NYSE), a
supplier of machinery and equipment to the drilling industry, has decided not to go
forward with a sale of 5.5 million shares by insiders. Also, Parker Drilling (PKD:NYSE)
filed to sell 10 million shares and is now unsure if it will go forward with the offering.
Instead, Parker plans to finance the rest of its Hercules purchase with cash on hand,
according to company vice president and treasurer Ed Hendrix. The company will hold
off paying down its debt, and will have to find an alternate way to finance their
international projects, he said. "You'll not see us slow down in any project," Hendrix says.
"It won't affect our 1998 capital expenditure program at all," referring to drilling programs
for international customers such as Chevron, (CHV:NYSE) Exxon, (XON:NYSE) and
Shell.
Concern, if not fear, is also warranted over fluctuations in the price of crude oil. One
Morgan Stanley Dean Witter oil analyst, Doug Terreson, has taken this concern to heart,
reducing his 1998 crude oil price forecast to $20 per barrel from $21. But even at $19 a
barrel, producers will still be profitable, said Dan Morrison, a research vice president at
Rauscher who follows exploration and production companies. He said he has not
adjusted his forecast of $20.59 per barrel for 1998, adding that the selling activity in the
drilling sector traditionally happens at year end. |
