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Top Stories: Mood in Oil Services Group Improving
By Mavis Scanlon
Staff Reporter
1/21/98 9:00 AM ET
Investors are showing increased confidence in the oil drilling
and services sector, buoyed by not only good earnings
reports, but also good news.
Shares of Marine Drilling (MDCO:Nasdaq), for instance,
gained ground Tuesday as the contract driller closed the
books on its best quarter to date. Marine Drilling also
announced a high-dayrate, long-term drilling contract with a
unit of Exxon (XON:NYSE).
In addition, Transocean Offshore (RIG:NYSE) said it has
received a contract commitment from Spirit Energy 76,
Unocal's (UCL:NYSE) Gulf of Mexico exploration unit, for a
new-build drillship to drill in ultra-deep water in the Gulf of
Mexico.
In a conference call Tuesday morning, Marine Drilling
executives reiterated that they had seen no indication from
their customers that the recent drop in the price of crude
would affect long-range exploration plans. MDCO's stock
surged 11.4% on the news; at the close it was up 2 to 19
9/16 on triple its average volume. The good news helped
push the group up as well -- the Oil Services Index (OSX)
shot up 5.55 to 107.14, the highest level the index has seen
since Jan. 2.
Tuesday's contract announcement by Marine Drilling
concerns the Marine 700, a semisubmersible rig currently
under construction at Friede Goldman's (FGII:Nasdaq)
HAM shipyard in Pascagoula, Miss. Delivery is scheduled
for February 1999, with steep daily penalties for late delivery.
Esso Exploration, an affiliate of Exxon, will use the rig to
drill in the Gulf of Mexico for a three-year term at an
estimated dayrate of $190,000, although the contract
stipulates it can move it anywhere in the world over the term,
except for the North Sea. Based on rig rates announced over
the past three months and published in the Offshore Rig
Locator by Offshore Data Services, $190,000 is the
highest dayrate yet for this type of rig in the Gulf of Mexico.
"A major company is still willing to pay a good healthy
dayrate to drill," says Poe Fratt, an analyst at Bankers
Trust covering the large drillers. "This is Exxon. They have
looked at where oil has gone and they're still willing to pay
for that rig."
The contract includes an option, to be exercised by July 1,
to extend the contract period to five years, at a lower
dayrate. This contract is MDCO's second long-term
deepwater contract, and furthers the company's strategy of
deriving increasing portions of its revenue from deepwater.
Rig utilization was up to 100% in the fourth quarter from 98%
in the third quarter, adding to the quarter's strong showing.
Net income for the quarter ended Dec. 31 was $18.6 million,
or 35 cents per share, on revenue of $57.8 million. In the
same period in 1996, the company earned net income of
$7.4 million, or 16 cents per share, on revenue of $31.9
million. While revenue increased 81% and earnings and net
income more than doubled, contract drilling costs and
expenses increased 46%. For the year, net income
increased to $58.3 million, or $1.11 per share, on revenue of
$190.3 million. Earnings for the year fell 3 cents short of
consensus estimates, but in a surprising turnaround, neither
MDCO's stock nor the overall sector was punished. For
1996, net income was $20.7 million, or 45 cents per share,
on revenue of $110.3 million.
Average dayrates for the quarter increased to $42,600 from
$27,500 in the fourth quarter of 1996. Fourteen of the 16 rigs
owned and operated by Marine Drilling are jack-up rigs,
which operate in water depths up to about 350 feet, and
fetch much lower dayrates than the giant semisubmersible
rigs capable of drilling in water depths up 7,500 feet.
The Marine 700 dayrate sends a strong signal to the
investment community, which has knocked drilling and oil
service stock prices down about 30% since November. The
correction has lowered the price of these companies to
levels that are once again attractive. Marine Drilling, for
example, is now trading at a price-to-trailing earnings ratio of
under 18, well below the broader market. Investors are
concerned that future growth rates are much lower than the
astronomical ones seen in 1997 and 1996. Granted, it is
difficult for a company to grow earnings 100% or better three
years running, but MDCO's 1998 growth rate is estimated at
a solid 49%, similar to many of its brethren.
Jan Rask, Marine Drilling's president and CEO, told the
analysts and investors assembled for Tuesday's conference
call that although energy prices are depressed now, the
sentiment of their customers is that average prices for crude
oil and natural gas for the year will be acceptable -- that is,
in the high teens for crude oil and near $2 for natural gas. He
added that the conditions in the oil market are more of a
short-term phenomenon than a long-term chronic condition.
"We consider offshore drilling to be a little like R&D for a
drug company," Rask says. "As long as they have the
money, they will drill." |
