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

To: Grommit who wrote (28449)	8/27/1998 3:36:00 PM
From: Paul Angell	Read Replies (1) \| Respond to of 95453

Grommit and all, <<There is the possibility that OPEC's clout is ineffective>> ...there is a strong possibility that OPEC can longer set price because Non-Opec production is so high. You may already know that there is a supply problem as well as a demand problem (from Asian economic downturn) - namely that world oil supply has been steadily rising for at least the last 2 years and this will not go away overnight. Drilling budgets are currently being cut for fundamental reasons and IMHO that will not change until Brent can sustain itself above $16/bbl. At current prices many large fields around the world have reached or are reaching break even but they will not cut production because the cash flow is still important and because their operating costs are relatively fixed. The first cutbacks are made in drilling because these are capital budgets and oil companies need to employ less capital when prices are low. Next thing to hit, but to a lesser extent, is the IOR work (stimulations, water and gas shutoffs etc). Exploration cut backs are more leveraged downwards because of the amount of exploration work necessary to make a find. Drilling rigs are working until the end of their contracts, which thankfully are quite long nowadays, but renewals look very shaky going forward. And what kind of renewals will be made if oil prices stay low?? They sure won't look the same as they did last year. International rotary rig count fell from 1300 to about 950 in 12mos to May 98 and US workover rig count is down 22% in 12mos to April 1998 and Canadian down 27%. The great wave we were riding was due to stable prices and the number of mature fields that were getting a new lease on life because of technological advancements. ie Horizontal wells for accessing more reserves and horizontal sidetracks with rotary rigs and coiled tubing units. Things are going to be bleak in the 3rd quarter for all the major producers and this is what the market sees right now. Savvy investors would say that now is a good time to start getting in and they would be right because there are so many negatives. Although it is tempting to "bet the farm", it would not be wise unless it's a spare farm or one of your many farms. Hell it might take another 6 months to know whether a recovery is real and it is safe to start investing in this sector. The market will sniff recovery long before we do I would wait another week or too for those knee-jerking city slickers to regain their sense of smell. Paul.