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

To: The Perfect Hedge who wrote (6892)	1/7/1998 12:17:00 PM
From: HH	Read Replies (1) \| Respond to of 95453

I think this person's view is sound on fundamentals. The question is not the average price of oil in 1998 but in 2000 and beyond. Even if you assume worst case scenario for oil in 1998, companies like DO, RIG, GLM have no-cut contracts thru mid 1999. Their earnings will increase in 1998 come hell or high water. They have paid off the huge debts that were the cause of their problems in 1981. They are not building on spec as they were doing in 1981 either. In fact, the rate of newbuilds is in balance with attrition rate. If we are going into a bear market, then the number of newbuilds will fall. IN fact, I hear two rigs being built on spec have been cancelled in the past month or so. If oil stays below $16 in 1998, then there is no need for any worries about additional capacity. Thus I think the worst, the very worst we would see is dayrates remaining flat 1998-1999. Which means that earnings will still be above 1997...which means that (at today's prices) these companies will be selling at yearend 1999 at 8-9x trailing earnings. Typically, for cyclical companies, that only occurs at an earnings peak. Will 1998 be the earnings peak? If you think that in 2000, the price of oil will still be below $16, then it is logical to think there will be a decline in exploration, and corresponding decline in dayrates. I dont think $16 in 2000 is very likely. That is why I am not selling any of the drillers I own.