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

To: Swede who wrote (8435)	1/16/1998 11:27:00 AM
From: HH	Read Replies (1) \| Respond to of 95453

This oughta help. briefing.com : Updated 01/16/98 This week's topic: Oil Service Companies Panelists James K. Wicklund, Managing Director, Energy Research at Dain Rauscher, Inc. Briefing: The major U.S. oil companies are expected to reflect lower oil and natural gas prices in their fourth quarter profits which will be about 10% below a year-ago, marking the first year-over-year decline in two years. Do you anticipate a reduction in exploration and production in the first quarter? James Wicklund: We expect a slowdown in E&P activity in the first quarter but not as a result of lower commodity prices but due to the seasonal slowdown in activity in the winter. Activity should be up year over year however, even though commodity prices are down. E&P companies disappointed investors in 1997 with lower than expected production volumes, oftentimes due to lack of equipment. They will spend dollars in excess of generated cash flow if needed to ensure production targets are hit. Briefing: What impact will the Asian crisis have on the oil service companies in 1998? James Wicklund: The Asian crisis will have no impact on oilfield service companies but will have some effect on E&P companies due to lower near-term prices. Oil companies do not predicate their capital budgets based on estimates of future oil prices or demand growth. They base them on the known decline rate of their current production base and the need to grow value by increasing net production volumes. If demand is high, the prices for their products are higher. If demand is low, pricing is lower. But this is not a controllable situation by the companies and the spending patterns of the E&P companies, especially internationally, are based on long-term cycles that near-term disruptions in demand do not effect. And if the oil/gas prices are lower near-term as a result of lower demand, oil companies will supplant that cash flow from debt/equity offerings so that spending levels, ie, revenues to the service companies, resemble a higher than noted price. Briefing: Recently, many oil service stocks have taken a beating in spite of strong fundamentals. When do you anticipate investor sentiment will change and what will be the catalyst(s) for this change? James Wicklund: After the seasonal drop in oilfield service stocks at the end of November, a number of factors including over-production by OPEC, reduced demand due to US weather patterns and the slowdown of Asian demand, dropped commodity prices and forced oilfield service stocks to continue their decline. At this point, all of the drop has been psychological since earnings estimates and activity forecasts remain unchanged. The psychology identifies crude oil prices as the barometer. While the level of oilfield service activity and commodity prices experienced a de-coupling of correlation several years ago, prices are still the sentiment indicator many are using today. Since 1987, the oil price on average has bottomed in February. Once the commodity price quits going down and/or winter ends, the stocks will bottom and move up. : Briefing: Which stocks are you recommending and/or avoiding? James Wicklund: We are recommending the deepwater drilling contractors since the break-even economics of most offshore projects require an oil price no higher than $10/barrel and the deepwater sector is still in its very early stages, giving significant stability to the earnings estimates. R&B Falcon (FLC), Noble Drilling (NE), Transocean (RIG) and Rowan (RDC) are our top picks. The onshore sector has been oversold based on expectations of lower dayrates. We look for minimal exposure to marginally economic oil drilling, a higher percentage of the fleet being diesel electric rigs, strong operating region and capable management. Bayard Drilling (BDI), UTI Energy (UTI) and Nabors Industries (NBR) fit that bill. Technology companies are becoming more critical to economic success and our top picks include Veritas DGC (VTS), a large independent land and marine contractors, Mitcham Industries (MIND) who leases seismic equipment to contractors, OYO Geospace (OYOG) who is manufacturing and developing certain seismic equipment, and Input/Output (IO), the worlds largest seismic equipment provider whose stock as been beaten down by misunderstandings. Lastly, we like the high capital cost equipment companies where incremental utilization pushes dayrates higher yet returns are not high enough to foster increased capacity. These stocks would include BJ Services (BJS), Weatherford (WII) and Tuboscope (TBI).