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. |
