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

To: JGreg who wrote (4783)	12/10/1997 10:45:00 PM
From: Bill Li	Respond to of 95453

Jefferies & Co. (Roderick McKenzie (713) 651-3874) ESV FL Roderick McKenzie, Jr. (713) 651-3874 Stephen M. Butz (713) 651-3861 Industry Overview Samir G. Chauhan (713) 308-4503 November 14, 1997 Rumors And Misperceptions Abound Oil service stocks came under tremendous selling pressure yesterday based on what we believe to be misconceptions. We firmly believe that: (1) Most operators will increase spending in 1998; (2) The shallow water GOM is alive and well and set for a great 1998; and (3) The Asian flu's influence on the oil service sector is minimal. Rumors And Misconceptions Appeared To Trigger Sell-Off We believe the sell-off in oil service stocks yesterday was based on several concerns and unfounded rumors. . Concerns about Chevron cutting capital spending in shallow water Gulf of Mexico. . Concerns about softening of rates in the shallow-water GOM and a fear of a collapse in drilling activity. . Concerns about the potential impact of the devaluation of Southeast Asian currencies and the impact on oil consumption growth. Chevron Comments Appear To Be Misinterpreted One of the most common notions heard was that Chevron was cutting back its shallow water GOM drilling activity. We spoke with Chevron yesterday about concerns it was cutting capital spending in shallow water Gulf of Mexico and gleaned the following facts: . Chevron was probably not going to meet its 1997 capital spending plans due to a lack of available equipment and personnel. The fact that it can not spend its budget due to equipment shortages is a very bullish sign for Oil Service. . CHV's total capital spending in 1998 will likely increase 5% - 10%. We believe the growth in exploration and production spending will likely be greater than in downstream expenditures. . Peter Robertson, President Of Chevron USA Production Company stated in a recent presentation "I can affirm that the Gulf Of Mexico is_once again_where it belongs_at the forefront of a global industry." This doesn't sound like a company that is about to pull the plug in an important market. E&P Companies Are Reporting Budget Increases During the past few days, we have seen a number of E&P companies announce 1998 spending plans: . Unocal announced a 1998 budget of $1.5 billion on 11/12/97, with exploration spending up over 50% from 1997 levels. . Exxon announced on 11/10/97 that it would have higher exploration and production spending in 1998 than 1997. Its Chairman, Lee R. Raymond, stated, "that's how we run Exxon, we go where higher returns are." . Mobil announced on 11/12/97 that it would "increase the share of investment spending going to exploration and production. Morgan Stanley\DW (Lovoi,J/Chiaro,D (713) 512-4481) BHI D Oil Services and Equipment (I/PET): Fundamentals Soon To Take Center Stage John V. Lovoi (713) 512-4481 P. David Chairo (713) 512-4485 Date: November 14, 1997 Type: Industry Overview ______________________________________________________________________ KEY POINTS - Yesterday, the energy service equities declined significantly in response to investor speculation that spending by major oil and gas operators would be down in 1998. Throughout the day, many of the stocks declined by as much as 10% - most closed the day down 3% to 5%. - With respect to exploration and production spending declines, our analysis indicates otherwise. Morgan Stanley's global energy team believes that E & P spending by each of the major oil companies, the US and Canadian independents, the European Majors, the European Independents and most of the National Oil Companies will be up significantly year over year. - This spending outlook is entirely consistent with our outlook for global supply/demand. We expect global demand for hydrocarbons to rise by roughly 3.5% next year. Given that excess crude and gas capacity are at historical lows, production will also have to rise. In addition, virtually every segment of the energy services and equipment sector has experienced meaningful pricing improvement in recent months. The combination of rising unit volume growth and pricing improvements will likely result in spending increases. - We can not help but believe that a significant portion of the last two days selling relates to portfolio manager apprehension. Most of the stocks are up between 50% and 100% for the year. In our note of roughly two weeks ago ("It Will Take More Than SE Asia to Knock This Train Off Its Tracks", October 27, 1997), we noted that 15 - 20% of downside was quite possible. Our opinion in this regard has not changed. The intra-day lows experienced yesterday clearly suggest caution in the near term. - Notwithstanding our outlook for continued high levels of volatility, valuation appears very reasonable relative to historical standards. Each segment of the industry is trading at or below its 10-year average P/E multiple and well below its average relative multiple. With this in mind, we feel very confident that over an investable period of time, the group will meaningfully outperform. Make your judgment. Happy investing! Bill