Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: mph who wrote (24563)	6/23/1998 1:55:00 PM
From: pt	Read Replies (1) \| Respond to of 95453

mph, most big lottery payoffs aren't immediate either...they are over a 20 year or lifetime time frame. It's not a perfect analogy because there is a deadline to buy the lottery ticket to get in the game, while drilling budgets are developed, and e&p projects arranged and conducted, over a drawn out time. But the budgets are based on financial projections which take into account the risks and rewards. The price of oil determines the ultimate reward. The expected draw-down rate affects the calculation of the present value of the ultimate dollars to be recovered. Both the similarities and differences between the lottery analogy and the situation with the drillers are important to understand. The differences (the oil cos don't get hot and bothered to drill as you put it) explain the seeming mystery of why the driller stocks go down when profits are still booming. The stock market looks ahead, realizing that the lower price will change the picture painted by the financial analysis the oil companies do, and the lower expected value of an e&p project will reduce the number of projects that are approved, so driller revenues and profits will have to fall. Whether a company is going to make Q2 or not is not the big concern--it is probably assumed they will make it. (They will get punished further if they don't.) It's the slow-downs coming down the road as a result of the oil price drop that are driving the stocks down. Regarding others' comments about OPEC cutbacks being bad for the drillers, I think that overlooks a few things. If cuts by OPEC and major oil-producing companies just (or primarily) reduce their market share, companies whose business is based on drilling and production outside those countries may not suffer much, so their fortunes will improve as a result of the cuts. Market share concerns, as I understand it, were behind the Saudi's efforts to boost output last fall, which contributed to the current oversupply situation. Paul