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

To: pt who wrote (24584)	6/23/1998 2:28:00 PM
From: Chuzzlewit	Read Replies (3) \| Respond to of 95453

Paul, I disagree with this statement: 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. Market share is irrelevant to governments. They care about net revenues and cash flows. Remember, we are dealing with commodities here, so outside of distinctions such as yields (which the market adjusts for anyway), there is little distinction between the sources of the oil. In other words, there is no concept of brand loyalty which would make market share a concern. As I see it, the real concern to the drillers ought to be the aggregate demand for rigs. The aggregate demand for rigs is determined by a finite number of factors: 1. The current available supply of oil plus expected supply of oil as new wells come on line from existing drilling contracts. 2. The expected rate of consumption of oil. Now, the decision to drill or not to drill is based on some additional financial considerations. These include the expected future price of oil as new wells come on-line, the expected day-rates for drilling, and the expected future interest rates. I think investors in general are confusing cause and effect. The cause of the problem is low consumption (Asian problems, el nino etc.). The effect is the delay of drilling new wells because of the generated surplus of oil. A secondary and concident effect (not a cause) is the drop in oil prices. Artificially propping up the price of oil through production cutbacks will serve to perpetuate the excess oil inventory (even if its in the ground) because it will reduce consumption, and thus delay additional drilling projects. TTFN, CTC