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

To: Giordano Bruno who wrote (30226)	10/3/1998 4:21:00 PM
From: Paul Angell	Respond to of 95453

jj, Thanks for the great piece from Barrons'. I took the liberty to paste in an excerpt from your post. Sorry for the long post. Iread all the great posts here on this thread but don't get much time to respond. I follow John Lovoi and the team at MSDW very closely, so I thought I would augment the Barron's stuff. Here's the essence of some research papers I read from MSDW recently: 1. Consolidation has been and will likely continue to be essential to profit improvement. It is a means of achieving 3 objectives: market concentration, geographic and product line diversification and technological differentiation 2. Best performance will come from companies:- i)with market leadership ii) who play in oligopolistic segments (franchise quality to paraphrase Warren Buffet) iii) who have a diverse portfolio of assets iv) who have significant technological diffentiation SLB best exemplifies these qualities 3. Merger and Acquisition acitivity has been strong in 1998. Belief that more M&A consolidation is needed. The reasons are:- i)M&A benefits have been masked by the downturn ii)When recovery starts the leaner companies will outperform the pack and show revenues streams that look close to those seen in 1995 - 1997. iii) leaner companies will not be as severely affected in the next downturn iv) land and shallow water drillers need consolidation the most - eg. 80% of GOM jack-up market has 6 players and only 3 are needed. 4. The return profile of the major oil service companies has improved permanently i) Next 5 yrs should see average revenue better than last 5 yrs BHI and HAL are best placed. 5. The negative view on land drillers is way off track:- i) common view that land drilling is deeply cyclical (2 yrs propserity followed by 10 years of struggle) is completely misguided ii) Long term health and lasting shareholder value will be created for the first time in history iii) only 20% of the rigs operating in mid-1980s are being used today iv) biggest threat is not excess capacity in land rigs but too much fragmentation v) consolidation needed to reduce the number of land rig operators so that 2 or 3 particpants will hold 70 - 80% of the market vi) companies with strong balance sheets and good management will emerge stronger from a downturn and have greater leverage when recovery starts vii) risk/reward for a select band of land drillers is very promising Companies best positioned are NBR and UTI. Here's the section of your article that caught my eye: <<< Once the market recognizes a turnaround in demand, however, it will be too late to buy these stocks, notes Morgan Stanley Dean Witter analyst John Lovoi. "You want to buy these stocks six months in front of large increases in demand," he says. Both analysts agree that valuations in the group -- where many stocks sell anywhere from six times to 12 times 1999 consensus earnings estimates -- are appealing. Growth, however, varies widely for the drillers from down 50% to up 50%, while the large oil service companies like Baker Hughes and Halliburton are expected to grow earnings about 5% from 1998. But the bulls say that a multiple of 15-20 is appropriate at "normalized" crude prices. The less-than-certain 1999 outlook means "these aren't all table-pounding stocks, but valuation dictates you overweight the group," adds Lovoi. Like Escott, Halliburton is among Lovoi's favorites in the oil patch. At Thursday's close of $28 3/4, Halliburton sells at 14 times Zack's consensus estimates of $2.05 a share next year. Moreover, Lovoi predicts that the company's merger with Dresser Industries will lead to cost savings of double the $250 million predicted by Halliburton. Some aren't waiting around for global demand to pick up. Oil service insiders, for example, are buying up shares of their companies at an unprecedented rate. Insiders are traditionally value investors and notoriously bad short-term timers, but last summer and fall they turned out to be prescient indeed, selling heavily just before the stocks began their descent (See Weekday Trader, "Oil Service May Fall Further As Insiders Dump Shares," November 17, 1997.) >> Good luck, Paul.