News Story....
Dow Jones Online News, Monday, July 13, 1998 at 11:58
By Loren Fox
NEW YORK -(Dow Jones)- A dramatic slide in world oil prices since
last fall has stunned the oil exploration and production industry. As a
result, profit growth slowed, but didn't stop, in the oil-services
business.
Analysts expect another strong performance in the second quarter from
the companies that rent drilling rigs, evaluate rock, make drill bits
and provide the whole array of products and services that make the
oilfield work.
Industry profits are expected to show about a 35% rise from last
year, said Schroder & Co. analyst James Stone. While that is good news,
growth has slowed from last year's robust pace and even from earlier
this year. The culprit is oil, which has been lingering at $14 to $15 a
barrel, well below the $18-to-$21 range considered typical.
"The oil price has been lower than expected for longer than expected,
so people are cutting their budgets," said Ken Sill, an analyst at
Credit Suisse First Boston Corp.
A survey released this month by Salomon Smith Barney concluded that
1998 spending on oilfield services will rise just 6.2% to about $90
billion, instead of the 11% increase projected in January.
The oil-price drop was most damaging to U.S. onshore drilling, a
market with lots of "marginal" wells that can be shut down on short
notice. Nabors Industries Inc. (NBR), the world's largest land driller,
is expected to report second-quarter earnings of 33 cents a share, up
from 29 cents a year earlier, according to First Call Corp., which
tracks analysts' estimates. Nabors changed its fiscal year, so the
year-ago was then its third quarter.
The oil-price drop was less of a blow to offshore drilling, where
contracts are longer term, but demand has been weakening for
shallow-water drilling rigs. In the Gulf of Mexico, the biggest and most
developed shallow-water market in the world, rates for some rigs have
fallen for the first time in years.
For example, a "jackup" rig - which floats out and extends legs to
the ocean floor - drilling in 300 feet of water in the Gulf of Mexico
commanded $47,500 to $62,000 a day last month. That's up slightly from
$44,000 to $60,000 a year earlier, but down a bit from rates in March,
according to Offshore Data Services, a research firm.
Wall Street expects Global Marine Inc. (GLM), a driller with many
jackup rigs, to post second-quarter earnings of 43 cents a share. That's
up from operating earnings, which exclude one-time items, of 35 cents a
year ago.
On the other hand, deepwater drilling - in 1,000 feet or more - has
yet to be hurt by the low oil prices, mostly because those projects tend
to be longer-term and promise greater returns. Diamond Offshore Drilling
Inc. (DO), one of the largest deepwater drillers, is expected to report
second-quarter earnings of 70 cents a share, up from 45 cents a year
ago, adjusted for a 2-for-1 stock split in August.
The segment of the oil-services industry least hurt by low oil prices
is offshore construction, encompassing the platforms and pipelines used
to produce offshore wells. That's because oil companies looking to
curtail spending are less likely to defer projects that are ready to be
hooked up to pipes and start producing, said Schroder's Stone.
So Global Industries Ltd. (GLBL), an offshore construction company,
is expected to report earnings of 16 cents a share for its first quarter
ended June 30, up from 11 cents a year ago, adjusted for a 2-for-1 stock
split in October.
But the oil-price malaise is even slowing the large, integrated
providers of oilfield equipment and services. Schlumberger Ltd. (SLB),
the world's largest and most diversified oil-services company, is
expected to report earnings of 70 cents a share, up 17% from 60 cents a
year earlier. By contrast, the company's earnings per share grew by 33%
in the first quarter.
Schlumberger is a leader in offshore rigs and oilfield software, both
of which are growing. The company also should record gains from its
high-technology offerings, including systems that evaluate underground
rock formations.
Low oil prices have fostered uncertainty in the industry,
accelerating consolidation. Nothing marked that trend better than the
February news that Halliburton Co. (HAL), another diversified
oil-services company, would acquire Dresser Industries Inc. (DI) for $8
billion - a deal expected to close in the second half of the year.
Halliburton, a market leader in production services, is expected to
report second-quarter earnings of 50 cents a share, up from 40 cents a
year ago. Dresser, a leader in steerable drills and drilling fluids, is
expected to report third-quarter earnings of 57 cents a share, up from
operating earnings of 50 cents a year earlier.
Thanks to weak oil prices, analysts see Baker Hughes Inc. (BHI)
reporting a drop in third-quarter profits. The company, which is very
sensitive in shifts in the U.S. market, is expected to report earnings
of 45 cents a share, down from operating earnings of 46 cents a year
earlier.
The merger bug also has bitten Baker Hughes, which had been
considered a potential takeover prospect. The company plans to buy
Western Atlas Inc. (WAI), a geological data specialist. Western is
expected to report second-quarter earnings of 62 cents a share, up from
earnings from continuing operations of 30 cents a year earlier.
Because of the lag time between oil prices and oil producers'
spending patterns, the effect of the slump in oil prices is anticipated
to be felt even more strongly in oil-services companies' next quarter or
two |
