FWIW
Top Stories: Oil Notebook: Equipment Suppliers Sizzle; Crude Creeps Up
By Mavis Scanlon
Staff Reporter
2/6/98 7:43 PM ET
Equipment Market Heats Up
Rig builders and equipment suppliers, taking advantage of the rising drilling rates, stole the stock limelight from the drillers this week.
A big beneficiary was Friede Goldman (FGII:Nasdaq), which shot up nearly 25% to 33 7/8 between Tuesday and Thursday. It was up another 9/16 Friday, to 34 3/4.
Friede is winning jobs away from big international shipyards, which is just one of the reasons its contracted backlog of orders is $320 million, up from $132 million at the end of third quarter. Included in that backlog is an $87 million rig-refurbishment contract from Marine Drilling (MDCO:Nasdaq), and $264 million ($127 million of which is a letter of agreement, not quite a contract yet) to outfit two huge bare hulls as North Sea-capable deep-water rigs for Ocean Rig ASA, the big Norwegian driller.
Jackson, Miss.-based Friede has recently completed its purchase of the Marystown Shipyard in Newfoundland, which will focus on building for the North Sea and Canadian markets. It also is on schedule with its new, state-of-the-art, 85-acre facility in Pascagoula, Miss., which will at least double its capacity. In an interview Wednesday, John Alford, Friede's executive vice president and CFO, hinted at an acquisition announcement early next week before the company releases year-end earnings.
But Friede wasn't the only stock that benefited. EVI (EVI:NYSE) and Varco International (VRC:NYSE) also had strong showings. EVI jumped 21% between Tuesday and Thursday, while Varco climbed 20%.
"In the case of each one of those stocks, there is an extremely strong backlog of orders, all of which are tied to deepwater floating upgrades or new-builds," says Joe Agular, an oil services analyst at Johnson & Rice in New Orleans. "Their business is secured by contracts with oil companies -- the commodity price is not going to change that."
Agular, whose firm co-managed Friede's July IPO but has not performed underwriting for Varco or EVI, just upped his 1998 and 1999 earnings estimates for EVI to $3.25 and $4.40 from $3.15 and $4.15, respectively, based on the strength of its present business and backlog, and the acquisition of Ampscot Limited, a Canadian manufacturer of oil well equipment.
To be sure, there was some profit-taking Friday. EVI slipped 7/8 to 47 3/4, while Varco fell 3/16 to close at 24 7/8. But industry observers say its tougher to sustain rallies in this sector because investors often decide to grab profits with every jump.
But expansion of the rig-building industry is imminent, says Matt Simmons, president of Simmons & Co., the Houston investment bank and research firm specializing in the oil industry. Simmons estimates that 450 rigs may be needed just in the offshore market over the next decade to develop the deepwater tracts currently under lease throughout the world. In a January article in The American Oil and Gas Reporter, Simmons examines the world's rig-fleet capability compared with the offshore acreage with commitments to be explored and developed, and finds the rig count comes up woefully short.
Crude Prices Still a Big Factor
Don't break out the champagne just yet over this week's rally in the oil service sector. Crude futures inched closer to $17 a barrel this week, but the main catalyst is the continued uncertainty in Iraq. Barring the U.S. military buildup in the Gulf, traders see a weak futures market. After trading up as much as 34 cents at midday, crude futures for March delivery settled at $16.71, up 13 cents.
"Unless something happens in Iraq there is no tangible reason why it should go up," says Peter Bisani, a futures and derivatives trader at Prime Charter in New York. Bisani just returned from a trip to Europe, and reported that the weather is just as warm over there as it is has been stateside, a definite negative for oil futures.
Even with the warmer-than-usual weather and lowered demand from many Southeast Asian markets, for the past few weeks the market has been fixated solely on Saddam Hussein's blustering on the weapons inspection issue, with the outcome of the current oil-for-food-deal negotiations coming in a close second.
"The market's been held up by the threat of military action," says Scott Ryll, an analyst and trader at GSC Energy in Atlanta. "Other than that, prices would be weak." What is needed to set any new pricing trend for the crude market is a resolution of the situation with Iraq, positive or negative, Ryll added.
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