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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Bob A Louie who wrote (4777)	12/10/1997 10:28:00 PM
From: Bill Li	Respond to of 95453

RP: Rauscher Pierce Oilfield Services- Opportunity for the Farsighted Rauscher Pierce Refsnes, Inc. (James K. Wicklund 214-989 Rauscher Pierce Refsnes, Inc. Oilfield Services James K. Wicklund (214) 989-1370 Lewis W. Kreps (214) 989-1386 Jeffrey A. Miller (214) 989-1374 Industry Overview "Half Empty Glass" Spills Service Stocks - Opportunity to the Farsighted The oilfield service sector continues to be buffeted by a laundry list of investor concerns, most centered around near-term concerns, seasonal factors, and "the glass is half empty" opinions. Clearly, one main factor is the profit taking, window dressing, locking in of bonuses, and other portfolio manager concerns brought about by the end of the year. Much like a football game, it is the fourth quarter with seven minutes to play and the Dallas Cowboys are up by 50 points (don't we wish!). It is prudent to come off the field and sit out the rest of the game, to get ready to start the next game ready and rested. Excuse the sports analogy, but it seems to fit since the fundamentals of the oilfield sector have not changed, earnings estimates are not being revised, and the individual companies report continuing strength. But if your portfolio is up significantly for the year, why sit through this turmoil for the possibility of a few more percentage points when you can spend the rest of the year enjoying the holiday season and locking in your gain. Annual Panic As for the season factors, every year we create a laundry list of concerns about activity next year. People with long memories will remember than 12 months ago, the greatest concern was the drop in cash flow available to oilfield service in 1997. Everyone was predicting that commodity prices for oil and gas would be lower in 1997 than 1996, resulting in lower cash flows and lower capital expenditures by oil companies, drying up the revenue line of the service sector. There was also the concern that the higher levels of drilling had re-created the oil glut and gas bubble and we would be awash in surplus production. Neither of these factors occurred. In fact the opposite effects were felt. We have heard concerns that we have not seen the end-of-year rush of activity seen in years past. The U.S. rig count will be up over 20% in 1997, the largest move up since 1981. The level was basically flat above 900 since March and is going out flat at that level rather than the normal seasonality in the group that causes the annual rig count to resemble a shallow horse-shoe. So while the end-of-year rush may not be seen, the level of activity seen in the fourth quarter and for the year are significantly higher than had been expected a year ago. It's All Down From Here???? There are concerns that it is the top of the cycle, things cannot get any better, so it is time to get out. These same concerns were voiced in March of this year when valuation issues were paramount and defensive valuations such as peak earnings were the range. The oilfield service segment is up about 70% from March. Valuation multiples should contract as the cycle rolls over, but no one in the industry is seeing this rollover yet. We have been recommending a swap of over-valued stocks into lower-valued stocks for the past few months, but the earnings growth is still so much higher than the rest of the market. Stocks should continue to move higher and outperform the broader market in 1998 even with lower valuation multiples. By this argument, investors should have exited Dell, Compaq, and other stocks three to four years ago when the second derivative of PC sales rolled over. Seasonally, oilfield service stocks get weak around this time virtually every year (see our timing model). Investors worry about 1) the rig count falling after the end of the year (which it has done each of the last 54 years); 2) the capital expenditures by oil/gas companies (who are trying to reverse the decline from depletion in their existing reserve base); and 3) how much longer the cycle can last (which should easily be three to five more years if companies' fiscal discipline and the laws of physics are followed). None of this is new. All are credible points. We have argued that the stocks where running too far too fast earlier this fall unless the industry was going to over-react, add uneconomic assets, and shut down the cycle in 12-18 months. The point is that this time of year represents a significant buying opportunity to investors with time horizons past December 31.