here is some more bargains, from Barrons!
Wednesday, March 25, 1998
Looking for Hidden Oil-Service "Gems"
By Vito J. Racanelli
As the nightmare of $10-a-barrel crude appears to have been averted -- for
now, at least -- some bargain hunters with cast-iron stomachs are shrugging
off the risks that remain and have begun to look for hidden gems in the
beaten-down oil-service sector.
Crude oil prices bounced back again
Wednesday on reports that big
producers Norway and Russia were
considering cutting their production.
The announcement Sunday that
Venezuela, Mexico and Saudi Arabia
would move to cut total oil production
by 1.6 million-2 million barrels a day
caused crude prices and energy stocks
to soar Monday before selling off again
the following day.
Nonetheless, if crude stabilizes at $15-$16 a barrel this year -- as many
observers now expect -- it could limit the damage that has occurred since
prices tumbled from $23 a barrel in late 1997. And though they've repeatedly
slashed their earnings estimates, Wall Street analysts still expect earnings
growth for many oil service companies to be around 20%-25% this year.
With price stability still so shaky, some shrewd buyers are going out of their
way to find oil service stocks that have something extra -- a company that
looks profoundly undervalued or has a unique product.
Like Tesco Corp., a small oil-service company with total market value of only
around $500 million. It's also Canadian, and service companies domiciled
north of the border usually sell at a discount to the group.
Nevertheless, this relatively unknown firm is about to roll out an
"underbalanced drilling" service that -- if successful -- could boost earnings
significantly. Should the group move, Tesco will undoubtedly go with it, but
the new service could offer downside protection -- and even some upside
potential
A few words on the science here. With
conventional drilling, drilling fluids
pressure inside the well must be higher
than the underground formation the well
is penetrating in order to prevent
blowouts, among other things.
Underbalanced drilling -- where the
pressure in the well is kept slightly
lower than that of the surrounding rock
formation -- entails greater risk, but
also does less damage and allows faster
penetration, thereby saving time and
money for E&P companies.
Tesco senior vice president Martin Hall says that perhaps the most important
characteristic of underbalanced drilling is that it can help increase oil recovery
by "up to 20% or more," depending on the type of formation. With oil prices
so low, every penny of cost savings counts, so not surprisingly producers are
showing more and more interest in this type of drilling.
Even without this promising new business, analysts figure that Tesco will grow
its earnings by about 25% this year and next, about in line with the rest of the
group. At Wednesday's close of $16 3/8 (in U.S. markets), Tesco is trading
at about 20 times analysts' consensus estimates of 82 cents a share for 1998
and at 16 times 1999 estimates -- roughly in line with its traditional discount to
its biggest U.S. competitor Varco International. (At $27 5/8 per share, Varco
is changing hands at about 24 times mean earnings projections of $1.14 a
share for 1998 and at 19 times 1999's numbers.)
But projected profits from the new business could be an added kicker to
Tesco's earnings growth rate -- pushing it up to 35% this year and next, some
bullish analysts contend. Calgary-based Miles Lich of Peters & Co. -- no
shrinking violet on this stock -- waxes enthusiastic about underbalanced
drilling, calling its potential "huge." Tesco executive Hall says that in a year the
new program could conservatively "add 20% to the bottom line."
Indeed, though Hall won't confirm it, Tesco allegedly has been talking about
underbalanced drilling with service giant Schlumberger and with Chevron,
among others. Hall expects to have more details on a deal to market the
service by the end of April. An agreement with a well-known company would
"put Tesco on the map," he adds.
Another small oil service company that some say stands out from the crowd is
Trico Marine Services, Inc., the second largest provider of supply boats in the
Gulf of Mexico.
That's because Trico Marine shares have been beaten down to a "ridiculous"
multiple of seven times First Call's mean earnings estimates of $2.75 per share
for 1998 and only six times the $3.46 per share consensus for next year,
asserts James Kaplan, a fund manager at J.L. Kaplan Associates in Boston.
(When was the last time you've seen single-digit P/E ratios for anything?)
Wednesday, the stock closed at $20 5/16, way below its 52-week high of 45
1/2.
Kaplan's fund recently bought more than 400,000 shares of the company, and
he isn't the only one who sees value there. Last month, Michael Price's Mutual
Shares fund (owned by Franklin Resources) disclosed that it owned 1.88
million shares of Trico, a bit more than 10% of the company's outstanding
stock. And Trico Marine insiders -- who were net sellers of stock when it
was flying high -- began buying shares of the company this month, too.
Kaplan claims that Trico Marine is
selling at too big a discount to the
group's bellwether, Tidewater, which
trades at 11x 1998 estimated earnings
and at ten times the consensus for next
year. "[If] you sold off Trico Marine's
boats one by one at current prices,
you'd get a value of $32 per share for
the company, " Kaplan asserts.
Of course, nobody's planning to do that
soon. And if the production agreement
doesn't hold up, oil service companies are bound to be decimated in a new
wave of price cutting. But if the going doesn't get too rough, Tesco and Trico
Marine could offer some opportunities for investors who aren't afraid of what
could be a rocky ride.
|
