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

To: waverider who wrote (12327)	2/21/1998 1:36:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 95453

DH, first, let me amend my statement by specifically excluding Value Line from the rest of the pack. They seem to be truly independent and their ranking system seems to work fairly well. They also do recommend avoiding certain stocks. Now to your question: I'm very bullish about the sector and believe it is one of the very few value plays around. I think that for the reasons that Baird has so eloquently stated, the land drillers are riskier in terms of earnings visibility than the rest of the sector. Value exists because we (the bulls) believe we know something that the market has not yet grasped. We believe that there is a shortage of rigs, and further, we believe that there is a shortage of rig manufacturers given the demand for new rigs. We believe that these shortages are independent of the price of oil, and thus profits for the off-shore drilling companies and rig builders should be independent of the price of oil. The market apparently believes that future profits in the service sector are tied to the short-term price of oil and/or the shortage of rigs is likely to be a short-term phenomenon. Time will tell, but this is one of the few cases where I think the market is incorrect. But even if I'm correct, we still have the $64 question. When will the market come around to the bulls' view of the sector? Until the market becomes cognizant of the value play here we won't be able to cash in. Regards, Paul

To: waverider who wrote (12327)	2/21/1998 1:47:00 PM
From: JZGalt	Read Replies (3) \| Respond to of 95453

You should not ignore analysts because they can be a magnifying factor on price movement. Let the money flows and the charts give you the timing once you have clearly define the fundamentals of the group and identified the strongest players in the industry. As far as analysts go, I wrote this to another list about two weeks ago: (ML is my shorthand for Merrill Lynch) The problem I see with the major brokerage houses is that you can extract their daily, weekly or monthly prognostication on this group going from the peak forward, you wouldn't know when they were actually published. Let me give you a series of examples from ML: 10/28/97 We see no fundamental factor in the oil service group that caused this decline. In fact, oil service fundamentals continue to look very strong even with the upcycle nearly 3 years old. 11/14/97 Oil service stocks have been very volatile in the recent market weakness. While many investors have voiced concern about exposure of oil service companies to Asia and Latin America, we do not see the direct exposure as a significant issue. 11/20/97 The sell-off of oil service stocks has intensified during the past two days, with many stocks in the group down more than 10% since Monday. There have been several fundamental factors raised as issues by the financial press in order to explain the decline, including the recent weakness of oil and gas prices, a potential slowdown in the growth of exploration and production spending by oil companies in 1998 and announcements of some newbuild rigs. We think the most significant factor is a drive by various institutional investors to nail down profits in a group that is still up more than 50% for the year as a whole. At the same time, potential buyers who like the group express concern about buying into a decline this sharp (especially near year end). 12/2/97 Notwithstanding the potential for additional weakness, we are maintaining our positive stance on the oil service group. We continue to expect oil and gas exploration and production spending to rise 12% or more next year, even if oil prices average $18-19 per barrel. Major oil companies and large independent producers have the balance sheets, cash flow and attractive prospects to allow them to continue their production growth strategies. The biggest issue for most oil companies have been shortages of qualified people and premium rigs, both of which are expected to persist in 1998. 12/2/97 in Year ahead blurb 1. Oil service shares have declined sharply since the end of October with the group down an average of 25% from their highs and many stocks down more than 30%. 2. As a result, multiples have come down to levels that we believe are very attractive at 15-23x estimated calendar 1998 earnings for the oilfield equipment and services stocks and 13-17x for the drilling contractors. Relative multiples that are below the market for all but a handful of stocks have only occurred near cycle peaks or when oil prices were under severe downward pressure. We are very confident that we are not near a cycle peak... 12/16/97 ú Oil Service shares have again sold off sharply in response to announcement of exploration and production budgets for 1998 by several major oil companies that have been below consensus (and our own) expectations. 1/7/98 ú The downward pressure that has continued on crude oil prices continues to push oil service stocks lower. If crude prices fall further, oil service stocks will probably weaken further as well. ú Notwithstanding this risk, we are maintaining our positive ratings on the oil service stocks in our coverage because we expect the majors to continue to raise their upstream spending which should generate strong earnings growth in 1998 and 1999; because we believe any weakness in oil prices below the high teens will be temporary; because we believe that oil demand growth is likely to remain solid (at or above 1.5 million b/d); and because the earnings on estimated 1998 earnings have fallen to attractive levels of 15-22x for the oilfield equipment and service companies and 10-14x for the drillers. 1/13/98 ú In view of the oil price weakness that has, we believe, been the primary factor putting severe downward pressure on oil service stocks, it seems unlikely that the positive surprises that do occur will be the catalyst that turns the group around on a near term basis. This stuff would be funny if people hadn't lost money following this advice. I wonder how many people bought in as the stocks continued to drop. ML gave up on the group right as they were about to hit bottom (1/13/98). My feeling reading these reports as well as the individual company reports was that when (and if) the larger brokerage firms get some following in this group again, these stocks are currently underowned by both institutions and individuals. That makes a powerful upside potential once the underlying positive dynamics of the groups once again starts to make news.