Dow Jones Newswires -- March 16, 1998
U.S. Gulf Lease Sale Unlikely To Lift Oil-Services Stocks
By Loren Fox
NEW YORK (Dow Jones)--Investors and officials in the oil-services
industry have their eyes on Wednesday's auction of exploration leases in the
Gulf of Mexico, but hopes are not high.
The main reason is the low oil price, which has curtailed enthusiasm as well
as some companies' spending power.
The sale is typically an important signal of long-term demand for drilling rigs,
pipes, production platforms and the host of other equipment needed for
pumping oil and natural gas underwater.
The last such auction, conducted in August, generated a record number of
bids - better than expected - and the resulting rush of optimism sent the
entire group of oil-services stocks on a four-day rally.
But it's a different story this time around. Industry watchers don't expect the
lease sale to lift oil-services stocks and consider a disappointment more
likely.
"I'm not that optimistic it's going to be strong enough to move the stocks,"
said Daniel Pickering, head of research at Simmons & Co., an oil-services
investment bank. "I think at this point, investors are very focused on low
commodity prices." Teddy's note: this Little Dog should be muzzled.
At the time of the last Gulf of Mexico lease sale, U.S. crude oil was selling
for $20 to $21 a barrel. On Monday, U.S. oil futures fell to $13.26, a
nine-year low.
And as a glut of oil has sent prices down over the past four months,
oil-services stocks have sank along with them. Shares of industry bellwether
Schlumberger Ltd. (SLB), above 76 after the August auction, closed
Monday at 69 13/16 on the NYSE, down 1 5/8, or 2.3%.
The sale, conducted as a blind auction by the Interior Department's
Minerals Management Service, offers five-year, eight-year and 10-year
exploration leases in the Central Gulf of Mexico, one of the world's hottest
drilling markets.
The August auction was for the slightly smaller Western Gulf of Mexico.
The previous auction of Central Gulf leases was last March, which received
$812 million in high bids.
The coming lease sale offers about 22.55 million acres - about 18% less
than a year ago - offshore Louisiana and Mississippi and includes 4,180
exploration blocks. Some 76% of the blocks are in the deepwater - more
than 2,600 feet of water.
Few expect this auction to reach last year's mark of $800 million.
Observers said that although they've heard a record number of bid
packages have been sent out, they wouldn't be surprised if this sale raised
$600 million.
"People are expecting a good lease sale, but I wouldn't be surprised if it is
mediocre," said David Herasimchuk, vice president at offshore drilling
company Global Marine Inc. (GLM).
At the same time, long-term demand is present for deepwater drilling.
Global Marine just unveiled an agreement Monday to build a new
deepwater drillship that would start work in 2000 for Exxon Corp. (XON).
Another indication of the interest in deepwater drilling is the fact that so
many companies have already bought deepwater leases in the Gulf of
Mexico. The interest in deepwater drilling has been rising, driven by
advances in technology and an easing of U.S. royalty requirements intended
to foster offshore activity.
In last March's auction of leases in the Central Gulf, 535 deepwater tracts
received bids, up from 401 in 1996, and up from 140 in 1995, according to
the Interior Department's Minerals Management Service, or the MMS.
Ironically, that may be an obstacle for Wednesday's auction in New
Orleans. Even an MMS spokesman said another record isn't expected after
three consecutive records.
In addition, many oil companies that were active in past lease sales -
especially the major oil companies - already have enough leases to drill for
years to come. That means the independent exploration and production
(E&P) companies, which have become larger participants in the deepwater
region, may have to pick up the slack.
The problem is that these E&P companies are more vulnerable than the
major oil companies to the drop in oil prices, and may have less cash
available for bidding.
So while the low oil prices shouldn't have that great an impact on existing
deepwater plans, which have four- or five-year time frames, they may set a
negative mood for competitive bidding among E&P companies.
"The projects at risk are near-term programs hurt by the low oil price," said
Ed Perks, energy analyst at fund company Franklin Templeton Group.
Perks is bullish on deepwater drilling in the long-term, and especially likes
Diamond Offshore Drilling Inc. (DO) and Transocean Offshore Inc. (RIG),
both deepwater drillers, and Noble Drilling Corp. (NE), a traditional
shallow-water driller which has quickly expanded into deepwater.
Perks said he could see a good lease sale, because of its focus on
deepwater tracts, providing a brief boost to shares of deepwater-oriented
companies.
But deepwater drillers have already outperformed other stocks, said
Simmons & Co.'s Pickering. He noted that Transocean trades at 10.2 times
estimated 1999 earnings, while shallow-water specialist Ensco International
Inc. (ESV) trades at eight times earnings. "The market has already adjusted
for deepwater performance," he said.
That leaves little room for upside coming out of this lease sale. And given
the lackluster sentiment for the industry now, there is still downside.
Even "sell-side" analysts at brokerage firms, who tend toward optimism,
have held off recommending the oil-services sector. "I think we're in a
holding period right now," said Joe Agular, an analyst at Johnson Rice &
Co. in New Orleans. "It's hard to escape the fact that oil is sitting below
$14 a barrel."
-Loren Fox; 201-938-5267; loren.fox@cor.dowjones.com |
