While i don't usually post entire articles, this one from The Wall Street Urinal seems ment to spread confusion and fear. Notice how XON, SLB and APC can all be mentioned in one paragraph (if you have no knowledge of the sector). i high lighted the positive part about the drillers.
Dow Jones Newswires -- January 6, 1998
Oil, Oil-Services Shares Fall On Weak
Commodity Prices
By Loren Fox
NEW YORK (Dow Jones)--Continued weakness in oil and natural gas
prices pressured oil and oil-services shares lower Tuesday, as worries rise
about 1998 earnings.
World oil prices have been falling for nearly two months, spurred by the
expected return of Iraqi oil to the world market and the prospect of
increased Saudi production, as well as by a mild winter. U.S. gas prices,
which usually start rising in November, have fallen instead, as the 'El Nino'
weather phenomenon has brought a mild winter in the gas-consuming
centers of the Northeast and Midwest.
The result has been a slow but persistent erosion in commodity prices. Since
October, oil has fallen from more than $21 a barrel to a recent price of
$16.98, and gas has fallen from more than $3.40 per million British thermal
units to a recent price of $2.21.
'The commodity psychology has reversed, and now it's negative,' said UBS
Securities Inc. analyst Wesley Maat.
The outlook isn't good, given that any potential price rise in 1998 will be
hampered by the economic slowdown in Southeast Asia. Earlier Tuesday,
investment banking powerhouse Goldman Sachs & Co. cut its forecast for
average crude oil prices for 1998 and 1999 to $17 a barrel from $18.
Investors have been taking it out on three groups: major oil companies; oil
and gas exploration and production (E&P) companies and oil-services
companies. All three have been among Tuesday's biggest declining sectors.
Recently, the Dow Jones index of major oil stocks was down 2.5% on a
market capitalization weighted basis; the Dow Jones index of E&P stocks
was down 3.4% and the index of oil-services stocks was down 3.9%.
The biggest U.S. oil company, NYSE-listed Exxon Corp. (XON), recently
was down 1 3/8, or 2.2%, to 59 13/16. The bellwether oil-services
company, NYSE-listed Schlumberger Ltd. (SLB), recently was down 3
1/16, or 3.9%, to 74 9/16. And Anadarko Petroleum Corp. (APC), one of
the best-known E&P companies, was recently down 3 1/16, or 5.3%, to
55.
Even the 'sell-side' analysts at investment banks seem to lack their usual
ability to point out a silver lining.
'It's a group sell-off,' said Michael Young, who follows major oil companies
for Deutsche Morgan Grenfell Inc. He believes the stocks, which have all
fallen at least 10% from their highs, could fall another 10%.
Young said he expects the major oil companies' 1998 earnings to be 10%
below 1997 earnings, and the market has yet to fully reflect the current poor
commodity prices.
PaineWebber Inc. analyst Robert Morris said investors should be 'worried
and cautious in the near term.' The drop in commodity prices has battered
the E&P stocks he follows, and he sees rough going for the next few
months. 'I can't grab on to anything as a positive catalyst,' Morris said.
Analysts who follow the various oil industries believe that although the
stocks have fallen over the past two months, there may be more room to
decline, based on valuations derived from multiples of earnings and cash
flow.
Although some analysts acknowledge that valuations have become
somewhat compelling for many oil-related stocks, most currently believe the
pessimism surrounding oil and gas prices is too overwhelming to justify any
short-term optimism. As a result, most are focusing on commodity prices
rather than on valuations.
PaineWebber's Morris, for example, said that stocks of exploration and
production companies are still about 15% above the trough in valuations that
the group hit in April. At that time, oil stocks also went into a dramatic slide
following a decline in oil and gas prices. 'No one cared about valuations
then,' Morris said, and he's holding back from touting them now.
Morris said the hardest-hit E&P stocks have been those most leveraged to
the competitive - and costly - Gulf of Mexico, such as Ocean Energy Inc.
(OEI), which was recently down 2 7/8. or 6.1%, at 44, and Newfield
Exploration Co. (NFX), recently down 2 1/8, or 9.4%, at 20 1/2.
Amid the oil-services industry, which has been even more volatile as a
group, the long-term outlook is still optimistic. Drilling activity is up, and that
means more demand for rigs, drill-bits, seismic surveys and other oilfield
suport.
But in the near term, there is little joy as the recent decline in the sector has
stopped the two-year bull run in oil-services stocks, which some analysts
believe became too pricey in September.
'This was clearly an eye-opening event for investors who thought the upward
pattern of the last two years would continue,' said UBS Securities' Maat.
'Those who thought it would be an escalator are finding out it's a
roller-coaster ride.'
Among the biggest decliners in the oil-services world have been stocks
vulnerable to U.S. gas drilling. including offshore driller Global Marine Inc.
(GLM), recently down 1 5/16, or 5.6%, at 21 15/16, and onshore driller
Patterson Energy Inc. (PTEN), recently down 5 3/8, or 15.4%, at 29 5/8.
In the meantime, industry watchers hang on and wait for some sign that oil
and gas prices have hit bottom. But the worrisome aspect is, as Deutsche
Morgan's Young said, 'commodity prices don't have to go lower to make
the stocks unattractive.'
-By Loren Fox; 201-938-5267; loren.fox@cor.dowjones.com |
