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Interesting article that bears on our discussion on value investing vs sinking prices in the oil patch. Comments?
cbs.marketwatch.com
SAN FRANCISCO (CBS.MW) -- I think we touched a nerve when we advised folks not to get "slicked" by bargain stocks in the oil patch.
Shares of oil drillers and oil service companies have been sliding all year. This week, even after British Petroleum Plc (BP) said it would merge with Amoco Corp. (AN), the Philadelphia Oil Services Index ($OSX) fell 4.4 percent in a day to its lowest point ever.
What's more, vast oil producers, like Royal Dutch Petroleum (RD), its shares at a one-year low Wednesday, received no benefit from British Petroleum's $48 million purchase of Amoco.
The oil fields these days are pockmarked with potholes. Who's rigging this game, anyway? Our CBS MarketWatch viewers want to know.
Some investors still see bargains, mostly among the 15 large U.S. oil drillers in the oil services index. They're brave souls: crude oil prices are flirting with 10-year lows. Commodities in general, as represented by the CRB-Bridge Futures Index, are sinking like a ship. The CRB (CR AO), a basket of things like gold, oil and food products, is close to a 5 1/2-year low.
Others are less sanguine about riggers -- the equipment companies that drill and perform onshore and offshore services for big and small oil companies.
The oil services index of 15 companies, by the way, rebounded early Wednesday, led by Global Marine (GLM), Noble Drilling (NE), Schlumberger Ltd. (SLB) and others, then pared its gains.
"Today," says oil believer Mark Andrew Withers of Lake Forest Park, Wash., "the world is producing adequate supplies of oil, but is using more than it is finding. Proved reserves have fallen and are falling. Whatever happens to oil prices, all oil companies must replace their reserves, not only to grow but to survive."
Withers says oil drillers, "especially the technologically advanced deep sea drillers, are in the unique position to provide the equipment and services required to find new reserves. Their contract revenues, and the resulting profit stream, continue to grow year-to-year, although some contract rates are below their peak of early this year."
Our main point was that weekend journalists, the folks you see recommending tremendous bargains after stock indexes plunge, might be reckless when they tell investors to seek bargains in a sea of declining securities.
"For the past year now, it seems like everybody who writes has been saying that the oils are coming back strong this summer. Many friends of mine have been of the same opinion -- much to their dismay now," says investor Doug Prather.
"I, on the other hand, have been saying that they still have more room to fall. Of course, I have had my problem stocks as well, but simple logic seems to dictate that that the oil sector has been doomed to poor performance for a long time now," says Prather. "I have little doubt that they will once again turn in stellar performances, but not until the basic supply and demand equation comes back into perspective."
Value in eyes of beholder
Our so-called "value investors," folks who seek companies whose market value might be unfairly low, still love the oil patch.
"I am a value investor and have begun to scoop up shares of a few of the strongest oil service companies, like Cliffs Drilling (CDG) and
Precision Drilling (PDS)," says Greg Coln. "As Warren Buffet said 'buy at the point of maximum pessimism.' If you check out Cliffs, for example, you will find a company with a forward and trailing P/E of around 5, with long-term contract business coming out their ears. They are, in fact, pulling rigs out of the U.S. to satisfy the demand in Venezuela."
Cliffs Drilling this week agreed to let R&B Falcon acquire it for about $420 million of stock. Both companies are in Houston.
"If you are more comfortable buying Dell Computer (DELL) or Microsoft (MSFT) at 80 times earnings and a 25 percent growth rate, or Amazon.com (AMZN) with negative earnings momentum, be my guest," says Coln.
Finally, this from Frank Sisto: "I've watched two friends buy drillers that were 'cheap' three months ago, and they're sitting down about 30 percent or 40 percent. I told them so, but hey, folks have to learn for themselves. I have to admit even I give them second and third looks these days, when stocks like Cliffs Drilling are trading under two times book value."
Investors, don't you love folks who say told-you-so?
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