MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 26, 1998 (5)
FEATURE STORY
OIL SERVICE SECTOR
NY Times - Sunday Edition
As roller-coaster rides go in the stock market, few have offered the thrills and chills of oil service stocks. The stocks soared last year, gaining an average of 40 percent in October alone, only to plunge since December on falling oil prices and turmoil in Asia.
Consider Friede Goldman International, which builds drilling rigs and provides services for offshore exploration and production. After it went public in July, its shares surged, reaching $48 in early November. But they fell even faster, and closed on Friday at $25.125.
But several analysts say that this and other declines, including sharp ones last week, may be excessive. For one thing, they say, prices have fallen even as the earnings and business outlook of most oil service companies has continued to improve.
The outlook stems from the history of oil services over the last 15 years. From the mid-1980s to the early 90s, hundreds of oil-service companies went bankrupt and others cut back or merged with competitors. A result was a shrinking of capacity so severe that even a modest upturn in demand for equipment and other services would have taxed the industry and led to a huge backlog of orders.
Oil companies' need for these services has indeed risen recently, as oil prices stayed relatively high, huge deposits in Russia and elsewhere were opened to Western ventures and new technologies made oil exploration more efficient. This higher demand continues today, and the diminished capacity of the oil services industry is unlikely to expand soon.
So why have investors sold off their shares? Some analysts say one reason lies in the many "momentum" investors who, with little understanding of the oil-service industry and its recent history, jumped in for the ride upward last year.
But investors took profits and sent the oil stocks reeling when the price of crude oil dropped by $3 a barrel, reaching a four-year-low of under $16 last week. The declines were due to a climb in member quotas at the Organization of Petroleum Exporting Countries, an increase in oil exports by Iraq under United Nations sanctions and fears about what the Asia crisis might do to oil demand.
True, such drops in prices in the past have caused oil companies to pull back on some of their exploration spending. And indeed, this may happen among some of the smaller companies that are planning modest drilling in existing and proven fields.
Most big oil companies, however, now try to base their projects on long-term trends in prices. Many of them are also under pressure to replace reserves.
As a result, "I don't think oil companies react to short-term change in oil prices as they did in the past," said Joe Agular, an analyst with Johnson Rice & Co. in New Orleans. That means that oil service stocks in general may well have dropped too far.
This long-term perspective is particularly true of oil-service companies like Friede Goldman. It caters mostly to large oil companies that explore and seek to bring wells into production in the deep waters of the Gulf of Mexico, off the west coast of Africa and elsewhere. Such projects usually require 7 to 10 years from exploration to production.
"This planning is much less susceptible to short-term commodity swings," said Roderick D. McKenzie, Jr., an analyst with Jeffries & Co. in Houston. Other public companies with a long-term focus include the Rowan Companies of Houston and Tidewater of New Orleans.
Nevertheless, when oil service stocks plunged in recent months, the fall was across the board. "Everything went down," Agular said. "Some companies in a particular area such as the deep water should have done better than others."
Indeed, Friede Goldman's business seems unaffected by the price drop. The enterprise hired 800 more workers last year, for a total work force of 2,000. It has also acquired some Canadian shipyards to augment its ability to build and upgrade offshore rigs.
And J.L. Holloway, chief executive of the company, which is based in Jackson, Miss., said it was building a $50 million shipyard on the Gulf Coast; the yard will be finished by June and employ an additional 2,000 workers.
"We are not pulling back," Holloway said. "There is no fundamental reason in our business why we should have a decrease in the price of our stock."
True, the stocks of oil-service companies that specialize in long-term projects, like Friede Goldman, often trade at higher price-to-earnings ratios than other companies in the industry.
Friede Goldman's estimated 1998 multiple was 33 at Friday's close, for example, compared with 15 for the Standard & Poor's Oil and Gas Drilling index.
But Arvind Sanger, an analyst at Donaldson, Lufkin & Jenrette, said such high multiples signified the earnings that investors expect when these ventures complete and are paid for many rigs now on order. "People are betting on the future of these companies," Sanger said.
At Friede Goldman, for example, firm orders for building offshore drilling rigs have risen to $350 million from $65 million early last year; an additional $550 million in orders could soon be secured.
These big numbers add up to optimism for Kurt Hallead, vice president of Cambridge Investments, a hedge fund based in San Francisco that owns Friede Goldman shares. "There are substantial earnings expansions ahead," Hallead said.
Analysts caution, however, that if the Asia crisis lowers oil demand or if oil prices stay down for long, even long-term projects may slow.
"Then the market is right" in pushing down the stocks, said McKenzie, the Jeffries analyst.
But, Sanger added, "Most observers believe that it's highly unlikely that oil prices will stay this low for long."
FEATURE STORY
A Look At The Oil Service Stocks
Ted Murphy TheStreet.com
Down more than 32% from their highs, the oil service companies have dropped out of hedge fund portfolios and into the gun sights of more traditional money managers.
The industry is now trading at a 10-year low on estimated price-to-earnings, a valuation that serves to discount a host of concerns. Falling oil prices, fears of a global economic slowdown and hints of weakness from Schlumberger (SLB:NYSE) and Diamond Offshore (DO:NYSE) have resulted in significant price deterioration.
Oil Services Earnings Continue to Grow
The peak in growth for the oil services industry is probably behind us, but my bet is that earnings estimates will power on through 1998 and into 1999. Growth at a price may not be enough for some hedge funds, but the combination should be attractive to a new group of buyers using more traditional investment metrics.
I should note that the investment case for oil service companies remains risky, despite the low current valuation. Investors continue to sell stocks that report slowing growth in day rates and rig utilization, despite rapid year-over-year earnings growth. Tidewater (TDW:NYSE) is a recent example, dropping 3 3/4 on Monday despite better than expected earnings.
Despite the risk, valuations on some individual companies now seem compelling. The screen below shows oil service companies rated Buy on my HighGrowth indicator that are currently selling at less than 10 times estimated earnings. Earnings continue to grow for all of these companies, as shown by the eye-popping, six-month annualized growth rates in the table below. The market is telling us, through declining share prices and low multiples, that earnings estimates for these companies will fall over the next year. My bet is that growth rates for the oil service industry will remain higher than the overall market.
I note that Ensco International (ESV:NYSE), a previous recommendation, has made this list. A 60% gainer has turned into a round trip, despite greater than expected earnings growth. I liked ESV at 16 times earnings last July; I recommend it here again at 10 times expected earnings.
High growth oil service companies with "Price-to-Estimated Earnings Multiple of 10" include CDG - Cliffs Drilling Company 9.7X, ESV - Ensco International Inc. 10.0X, MDCO Marine Drilling Cos. 9.9X, PDE - Pride International 9.8X, RDC - Rowan Cos. 9.6X and TDW - Tidewater Inc. 8.5X.
MISC. STORY
The Bill Shoemaker Rig Is Moving Off The Grand Banks.
St. Johns Evening Telegram
The Amoco-leased semi-submersible drill rig was released Jan. 25 after completing a 4,418-metre well on Amoco's West Bonne Bay property, the Canada-Newfoundland Offshore Petroleum Board reported in its weekly status report on the offshore Monday.
The rig had pulled up anchors Monday and was waiting to be towed to the Gulf of Mexico, where it will be used on a Shell Oil exploration project.
The rig was originally scheduled to remain in the Jeanne d'Arc Basin this winter to drill a well on the Hebron field for Petro-Canada and Husky, but unexpected delays at West Bonne Bay forced the oil companies to hold off until next year.
Amoco is expected to complete the evaluation of its downhole data by the end of March.
MARKET ACTIVITY
OIL & GAS PRICE REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
INDEXES
The Toronto Stock Exchange 300 Composite Index gained 1.4% or 92.15 to 6583.14. In comparison, the Oil & Gas Composite Index climber 2.6% or 154.24 to 6079.36. Among the sub-components, the Integrated Oil's gained 1.6% or 138.16 to 8571.94. The Oil & Gas Producers rose 3.1% or 158.94 to 5321.52. The Oil & Gas Service Sector gained 2.3% or 56.00 to 2519.14.
INDEX CHARTS
TSE 300.......... canoe.quote.com
O&G Composite. chart.canada-stockwatch.com
Integrated Oil's.... chart.canada-stockwatch.com
O&G Producers.. chart.canada-stockwatch.com
O&G Services..... chart.canada-stockwatch.com
NEW PHLX OIL SERVICE SECTOR
bigcharts.com.
lonestar.texas.net
MOST ACTIVE
Norcen Energy Resources, Ranger Oil, Petro-Canada, Canadian Occidental Petroleum, Canadian Natural Resources, Gulf Canada Resources and Renaissance Energy were among the top 50 most active traded issues on the TSE.
Norcen Energy Resources gained $4.15 to $19.45, Suncor Energy $1.55 to $48.80, Renaissance Energy $1.45 to $28.05, Talisman Energy $1.20 to $38.80, Canadian Natural Ressources $1.15 to $27.40, Shell Canada A $1.10 to $23.15 and Canadian Occidental Petroleum $0.75 to $30.00.
Percentage gainers included Norcen Energy Resources 27.1% to $19.45, Bellator Exploration 16.7% to $1.40, TransGlobe Energy 14.3% to $2.00, Oiltec Resources 8.9% to $2.45, Bitech Petroleum 8.3% to $3.25 and Elk Point Resources 7.8% to $5.50.
On the downside, Pendaires Petroleum fell $1.00 to $8.00 and Northrock Resources $0.50 to $18.50.
Percentage losers included Gentry Resources 13.7% to $1.01, Benson Petroleum 13.2% to $1.25, Pendaires Petroleum 11.1% to $8.00, First Calgary Petroleums 9.8% to $1.01, Bow Valley Energy 8.6% to $1.50, Blackrock Ventures 8.5% to $1.10, Canrise Resources 7.1% to $5.20 and International Rochester 6.1% to $1.55.
No new 52-week highs.
Black Sea Energy, Centurion Energy, Chauvco Resources International, International Rochester, Mercantile Petroleum International, Pacalta Resources, Pendaires Petroleum, Pinnacle Resources, Saxon Petroleum and Startech Energy reached new 52-week lows.
There were no service companies, or companies with close ties to the industry, among the top 50 most active traded issues on the TSE.
Canadian Fracmaster gained $2.00 to $19.50, Prudential Steel $1.00 to $13.50 and IPSCO $0.75 to $52.00.
Percentage gainers included Canadian Fracmaster 11.4% to $19.50 and Prudential Steel 8.0% to $13.50.
On the downside, Shaw Industries A fell $2.40 to $41.60, CE Franklin $1.05 to $10.00, Akita Drilling A $0.75 to $11.00, Plains Energy Services $0.75 to $8.00 and Tesco $0.50 to $18.50.
Percentage losers included CE Franklin 9.5% to $10.00, Plains Energy Services 8.6% to $8.00, Kelman Technologies 6.7% to $1.68, Akita Drilling A 6.4% to $11.00 and Shaw Industries A 5.5% to $41.60.
ATCO I and ATCO IIreached new 52-week highs.
Bromley Marr reached a new 52-week low.
Over on the Alberta Stock Exchange, Bearcat Explorations, Stampede Oils, Alliance Energy, Red Sea Oil, Colt Energy, Oilexco, Tessex Energy, Doreal Energy, Jerez Energy and First Star Energy were among the top 30 most active traded issues.
GronArtic Resources gained $0.21 to $0.62, Belfast Petroleum $0.20 to $2.65, Bearcat Explorations $0.15 to $0.58, Moxie Petroleum $0.10 to $1.60, Sunburst Oil & Gas $0.10 to $1.10, Stellarton Energy $0.10 to $4.60, Doreal Energy $0.08 to $1.30 and Endeavor Resources $0.08 to $0.29.
Percentage gainers included GronArtic Resources 51.2% to $0.62, Stampede Oils 40.0% to $0.28, Endeavor Resources 38.1% to $0.29, Rockport Energy 21.7% to $0.28, Fox Energy 16.3% to $0.50 and High Point Energy 14.3% to $0.40.
On the downside, Brandon Energy $0.35 to $0.30, Canadian Crude Separators $0.33 to $4.17, Kensington Energy A $0.15 to $1.10, Danoil Energy $0.13 to $1.42, Parkcrest Exploration $0.12 to $1.45, AltaQuest Energy $0.10 to $2.25, Bolt Energy $0.10 to $0.70, Global Link International $0.10 to $1.10, ICE Drilling $0.10 to $0.80, Kensington Energy B $0.10 to $1.05 and Proprietary Energy $0.10 to $2.20.
Percentage losers included Brandon Energy 53.8% to $0.30, Ramarro Resources 23.1% to $0.20, ABX Resources 16.0% to $0.21, Oilexco 13.3% to $0.26, Bolt Energy 12.5% to $0.70, Kensington Energy A 12.0% to $1.10 and Petro-Reef Resources 11.4% to $0.70.
Moxie Petroleum and Willow Creek reached new 52-week highs.
Brandon Energy, Del Roca Energy, International Hydrocarbons, NTI Resources, Oilexco, Real Resources and Scimitar Hydrocarbons reached new 52-week lows.
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