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

To: marc chatman who wrote (22622)	5/21/1998 1:36:00 PM
From: Lazlo Pierce	Read Replies (1) \| Respond to of 95453

Well the OSX has turned negative (seemed inevitible), the question now is how low do we go today. I'm sure the shorts will be emboldened again. Dave

To: marc chatman who wrote (22622)	5/21/1998 1:58:00 PM
From: Grommit	Read Replies (2) \| Respond to of 95453

Back to basics... Who remembers economics 101? I will try. The price of oil will stabilize at the marginal cost (in the economics sense, not the accounting sense) of producing oil unless artificial production curbs can be instituted. So the oil producers will make their justified profit, and will make monopoly profit only if they can limit production. Basic and simple. We have seen that OPEC seems to have lost its ability to keep oil prices near $20. Is it due to a changing of the politics or economics of the OPEC producers, or has technological anvances in other places lowered the marginal costs of producing that last barrel of oil we are getting? I do not know. When oil prics drop, oil demand will increase. Oil production will increase. I have heard industry CEOs state tongue in cheek that dropping oil prices will help them. I think there is more to it than meets the eye. Where in the world will the oil come from? Which wells will become unprofitable? Where will the oil services dollars be spent? Production will remain high and depleted oil will need to be replaced. If expensive oil can be replaced with cheaper oil, it will also be replaced. So, you tell me, please -- at this price or slightly above, where does drilling continue and where does exploration continue? Exploration quantity is based on volume of oil required, exploration location is based on oil price. Now, if the price issue is causing E&P budgets to be cut in the gulf or in other places, (not sure that it is really -- except in a few isolated cases??) it tells me that those locations are not quite profitable at the expected oil prices levels over the life of the wells. Does that say that the oil production increases must come from OPEC cranking it up? OPEC market share goes up and then they can control pricing more effectively. Prices go up... Make sense? Too basic? Too confusing? Hope it helps and eager to see your replies.

To: marc chatman who wrote (22622)	5/21/1998 2:07:00 PM
From: 007	Respond to of 95453

Marc, I really don't know. It seems like there is some definite softening in the shallow ones, but since oil prices are so hard to predict, I don't think it's wise to come to conclusions about the future of dayrates. In any case, there seems to be much tighter supply in the deepwater, but of course this is subject to changing e & p budgets. What's important to me is that, according to some of the companies, the outlook isn't very good. Of course it may turn out better than is expected, and perhaps, the deepwater rigs will not see any decline. I feel that taking on the risk of declining dayrates isn't necessary to do well in this sector, and given the current outlook for oil, it's a risk that has a good chance of going unrewarded. A rise in oil lifts all "boats", but a drop in oil most dramatically affects the earnings of the drillers - from shallowest to deepest in decreasing proportion. However, dayrates can drop without any significant curtailment in e & p activity. This is quite plausible offshore where the supply shortage may be at a peak, and reductions in dayrates can occur without significant changes in utilizaion rates - one or two idle rigs is enough to change the market. On the land, dayrates are suffering as rigs are stacked or bid down to keep from being stacked. Still, there is a lot of activity in the gas area at these lower dayrates. So services companies haven't been hit nearly as hard. My view is that the earnings in the services sector are much less vulnerable to commodity prices, therefore, a wise investment in this period of high activity and weak commodity prices is in the services sector. And I would add, that the earnings of the offshore services are probably the least vulnerable. If oil stays low long enough, we may eventually see an increase in the number of offshore rigs, a decrease in dayrates, but an overall increase in offshore activity that will be beneficial to the offshore services business. In summary, it makes sense to me to choose solid companies that should do very well even with today's commodity prices. OO7