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Top Stories: OPEC Production Reduction Chatter Intensifies, but Skeptics Abound
By Mavis Scanlon
Staff Reporter
3/19/98 8:25 PM ET
Investors committed to the oil patch are on a wild ride this week. Manic-depressive might be the best way to describe the sentiment
This week a solid lease sale, coupled with renewed speculation about a possible reduction in production by the OPEC nations, has fed some tentative optimism. Such optimism has been crushed before in the past few months, and the recent moves have traders wondering whether a breakout could possibly occur with oil prices still ailing.
Banker's Trust analyst Poe Fratt said the recent lease sale reassured wary investors that oil companies -- who anted up an average of more than $1 million per block for GOM drilling rights -- are taking a long-term view of their industry. In that long-term view, described as "years," there is little doubt oil companies will continue to drill for oil, onshore and offshore.
But what about the short term, the next few quarters?
Oil patch equities are still following crude pricing, and even with the OPEC nations rumored to be considering production cutbacks, prices eased. Traders remain pessimistic that OPEC nations will have the will to cut production -- and near-term revenue -- in order to increase oil prices. Even a best-case scenario of a 50% improvement in oil prices, which would go a long way toward easing the sector's price-related pain, could take some time, due to the persistent oversupply in the crude market.
"Look how far we've fallen since November," says Tom Bentz, senior vice president of energy at Cresvale International. "If we rallied back 50% of the whole move, that'd get us back to $19.80. If we could get that as a potential target then maybe that low turns out to be a final low," he says, referring to Tuesday's dip.
Although Thursday's action in the crude market was quiet, with April delivery crude settling at $14.30, down 3 cents, Bentz at Cresvale says he doesn't rule out the possibility of one more pullback somewhere in the next week to test the recent low. "The trend is still down until proven otherwise," he says.
In the last several days oil producers from Norway, Mexico, Egypt and Venezuela have expressed a wish to take some action to cut production to bolster prices. Thursday morning, news wire reports stated that Mexico energy minister Luis Tallez flew to Zurich to discuss oil prices with European and Arab nations.
Oil analysts first began trimming their per-barrel prices for this year and next in January after Asia, El Nino, Iraq, and an overproducing OPEC conspired back in November to inflict their own special torture on investors in a sector that had performed so well for most of 1997. But it's only been in the last couple of weeks that oil service analysts at the major investment houses began reducing their earnings expectations. Estimates for the top tier and mid-cap oil service and drilling companies have been reduced by about 10%, but some say additional reductions are necessary before stock prices for the sector bottom out.
The latest reduction comes from Mark Urness at Salomon Smith Barney, who covers oil drillers. The largest reductions, he wrote in a research report, "are for companies with premium jackup rigs in the Gulf of Mexico." Urness forecasts flat day rate increases for the second quarter for these rigs, which drill in up to 350 feet of water, due to slower-than-expected oil company spending growth. On the land side, Urness anticipates flat dayrates most of the year.
Urness lowered his 1998 and 1999 estimates for 10 drilling companies, among them Diamond Offshore, (DO:NYSE), Ensco Intl. (ESV:NYSE), R&B Falcon (FLC:NYSE), Rowan Companies (RDC:NYSE) and Nabors Industries (NBR:AMEX). He reduced his 1998 estimate for DO, for example, to $2.90 from $3.20, and his 1998 estimate for ESV to $2.65 from $2.95. Estimates for 1999 saw slightly smaller reductions.
Land drillers as well as offshore drillers with jackup rig fleets saw selling pressure Thursday. ESV closed at 27, down 1/2, or 1.8%, and Rowan closed down 3/8, or 1.4%, at 26 7/8.
"Oil service stocks have indeed become a proxy for oil prices," say Wes Maat, who covers the sector for UBS Securities. "I think the group will be bottoming over the next few months as estimates are reduced and as expectations get ratcheted down."
Expectations being ratcheted down is exactly what a money manager like Dan Rice, who manages the State Street Global Natural Resources fund, would like to see before he re-enters the sector. Rice began selling off his drilling and service stocks back in August and September when his target prices were being met and macro indicators pointed to a drop in oil, replacing the weight with undervalued exploration and production companies.
"I want to see the fear of God [in these companies]," he says. "I want to see capital expenditure plans cut and I want to see people acknowledge these low prices and to evaluate their projects based on $15 or $16 oil." |
