U.S. Oil-Service Companies' Profit Gains Slow: Industry Outlook
June 23 (Bloomberg) -- Earnings growth for oilfield service
and equipment companies such as Baker Hughes Inc. and Ensco
International Inc. slowed in the second quarter, as lower oil
prices cut demand.
Profits will rise 15 percent to 20 percent from the year-
earlier quarter. That's down from an average first-quarter gain
of about 30 percent for companies that provide equipment and
services for oil production and exploration.
Oil prices averaged 26 percent less than in the year-earlier
quarter, leading oil companies such as Amoco Corp. to cut
exploration spending. That's been bad news for investors in oil
service companies such as Schlumberger Ltd. and Halliburton Co.
''Everybody feels the heat from oil prices coming down.''
said Daniel Pickering, an analyst with Simmons & Co.
Companies that serve the deep-water market, generally
considered waters of more than 1,000 feet, will do best in the
quarter, said Ken Miller, executive vice president at Cambridge
Investments Ltd., a hedge fund that invests in oil-service
stocks.
Oil companies haven't cut spending on deep-water drilling
because they're locked into multiyear contracts for expensive
rigs. In addition, they need the huge reserves that deep-water
fields promise because production from many of the world's oil
fields is declining.
Hitting Pay Dirt
Diamond Offshore Drilling Inc. and Transocean Offshore Inc.
are among companies that will benefit from the stronger deep-
water services demand, analysts said.
Diamond is expected to make 71 cents a share diluted,
compared with 46 cents in the year-earlier period, according to
analysts surveyed by IBES International Inc. Transocean is
expected to make 66 cents, according to IBES, up from 28 cents.
Land drillers and operators of shallow-water rigs won't fare
as well. Rents for land-drilling rigs in the U.S. and jack-up
rigs used along the coastal areas of the Gulf of Mexico fell in
the quarter.
Daily rates for rigs that operate in water as deep as 300
feet in the Gulf of Mexico dropped to as low as $40,000 in the
quarter from an average of about $52,000 a year ago.
''The risk of negative surprises is significantly higher in
the second quarter,'' said James Wicklund, an analyst at Dain
Rauscher Wessels. Most analysts are revising their estimates to
reflect the lower growth, he said.
Estimates have dropped for Ensco, which operates shallow-
and deep-water rigs. Ensco now is expected to earn 57 cents a
share, the average estimate of analysts polled by IBES, down from
61 cents in the first quarter. Ensco earned 37 cents in the
second quarter of 1997.
Building Boom
Halliburton is expected to do better because it was able to
raise some prices and had strong revenue from its construction
business, which, among other things, builds deep-water equipment.
Dallas-based Halliburton is expected to report earnings of 52
cents, according to analysts surveyed by IBES International Inc.,
up from 39 cents a year earlier.
In February, Halliburton said it would buy Dresser
Industries Inc. of Dallas, a supplier of a variety of oil-
production equipment, for about $9 billion in stock and assumed
debt. Dresser is expected to earn 56 cents a share in the current
quarter, up from 50 cents in the year-earlier period.
Baker Hughes won't fare so well. It's expected to earn 46
cents diluted, down from the 48 cents it reported a year earlier,
IBES estimates show.
Houston-based Baker sells more drill bits and drilling
chemicals than other large oil-service companies. Those products
are used in all types of drilling, making Baker more susceptible
to drops in spending on land and shallow-water projects, Wicklund
said.
Baker's earnings will be better sheltered from changing oil
prices after it acquires Western Atlas Inc., a specialist in
seismic technology -- the use of sound waves to map underground
formations to see if they hold oil.
Seismic technology is essential for finding deep-water oil
deposits, and cuts the cost of drilling by greatly reducing the
risks of hitting ''dry holes,'' wells that don't produce oil. Oil
companies are still spending heavily on seismic services despite
the oil-price drop.
Western is expected to make 61 cents a share in the quarter,
up from 30 cents in the year-earlier period. Baker said in May
that it would buy Western for $5.7 billion in stock and assumed
debt.
Other companies, such as Veritas DGC Inc., that specialize
in seismic-exploration technology, also will have higher
earnings. Houston-based Veritas is expected to make 51 cents a
share diluted in its fourth quarter ending in July, according to
analysts surveyed by IBES, up from 37 cents in the year-earlier
quarter.
''Every oil company knows its reserve base is in decline,''
Wicklund said. ''It has become more important to spend money to
reduce the risks of drilling.''
Company 2nd-Qtr Year-Ago Number of
Estimate EPS Analysts
Baker Hughes* $0.46 0.48 23
Schlumberger 0.74 0.60 17
Halliburton 0.52 0.39 14
Noble Drilling 0.40 0.25 16
Ensco Intl 0.57 0.37 21
Rowan Cos. 0.55 0.44 20
EVI Weatherford 0.66 0.42 6
Smith Intl 0.72 0.59 15
Camco Intl 0.73 0.64 12
Transocean Offshore 0.66 0.28 21
Diamond Offshore 0.71 0.46 21
Cooper Cameron 0.82 0.62 14
Patterson Energy 0.09 0.14 6
UTI Energy Corp. 0.20 0.13 6
Estimates provided by IBES International Inc.
*Fiscal third quarter ending June 30
03:52:37 06/24/1998
Any redistribution of Bloomberg content, including by framing or similiar means, is expressly prohibited without the prior written consent of Bloomberg L.P. Any reference to the material must be properly attributed to Bloomberg News.
The information herein was obtained from sources which Bloomberg L.P. and its suppliers believe reliable, but they do not guarantee its accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation of the purchase or sale of any securities or commodities.(C) Copyright 1998 Bloomberg L.P. BLOOMBERG, Bloomberg News, Bloomberg Financial Markets, Bloomberg Television, Bloomberg News Radio are trademarks, tradenames and service marks of Bloomberg L.P. |
