Friday October 16, 12:49 am Eastern Time
Most offshore drilling firms'
earnings fall, but stocks rally
By Andrew Kelly
HOUSTON, Oct 15 (Reuters) - Most offshore oil drillers
reported lower earnings this week and warned that things
will probably get worse before they get better.
Nevertheless, their stocks surged on Thursday, outpacing a broader market rally amid a
growing feeling that drilling stocks might have bottomed out after a long, brutal sell-off.
The Philadelphia Stock Exchange's OSX index of oil service and drilling stocks gained
9.5 percent to 54.67 on the day, while the S&P 500 index rose 4.2 percent to 1,047.49.
The stock of individual drillers such as Global Marine Inc.(NYSE:GLM - news), land
driller Nabors Industries, Inc.(AMEX:NBR - news) and Diamond Offshore Drilling
Inc.(NYSE:DO - news) did even better on Thursday with gains of 10.5 percent, 15.3
percent and 16.3 percent, respectively.
On Thursday, Global Marine's stock rose $1.00 to $10.50 a share, while Diamond
Offshore's stock added $3.44 to $24.50 a share, both in composite New York Stock
Exchange trading.
Nabors Industries' stock gained $2.125 to $16 a share in trading Thursday on the
American Stock Exchange. Nabors Industries is expected to report third-quarter results
next week.
And Ensco International Inc.'s (NYSE:ESV - news) stock went up 75 cents to $10.25 a
share, a gain of 7.8 percent from Wednesday's close, in composite NYSE trading.
After falling more than 50 percent in the first nine months of the year, mirroring a steep
drop in global oil prices, the OSX index hit a low around 47 in late September and
appeared to be testing support around that level again late last week.
''We think we know where the bottom is now,'' said Mark Urness, an analyst with
Salomon Smith Barney.
Urness said there was great uncertainty about the outlook for the sector and that a
recovery in oil prices would take a long time to translate into increased demand for
drillers' services.
Many analysts believe, however, that the long slide in drillers' stock prices has brought
them to a level at which the risk of further losses is far outweighed by potential gains.
Most agree that a rally in drilling stocks will occur before their earnings start to recover,
just as their descent anticipated the downturn in their earnings.
''The stocks will move ahead of the pick-up in (drilling) activity,'' said Urness.
Investors looking to drilling companies for bullish signals this week would have been
disappointed, however.
Global Marine on Wednesday reported a 40 percent drop in third-quarter net income to
$47.2 million, or 27 cents per diluted share, from $78.4 million, or 44 cents a share, in
the year-ago quarter. The Houston-based offshore contract driller said the utilization
rate for its fleet of drilling rigs fell to 93 percent from 99 percent in the same period of
1997.
Ensco International of Dallas said on Thursday that its third-quarter net income fell to
$59 million, including a one-time gain of $6.5 million, or 42 cents per diluted share, from
$67.8 million, or 47 cents per diluted share, in the same period a year ago. The gain,
which was five cents per diluted share, net of tax, came from insurance proceeds on the
loss of the ENSCO Kodiak II, a large anchor-handling tug-supply vessel.
Average daily rental rates for ENSCO's fleet of drilling rigs, operating mainly in shallow
waters, fell to $51,600 from $55,800, while the fleet utilization rate fell to 86 percent,
excluding shipyard downtime for upgrades, from 95 percent a year ago.
''Average dayrates for our equipment will likely continue to trend lower over the next few
quarters and further erosion of utilization is possible,'' said Carl Thorne, chairman and
chief executive officer.
Diamond Offshore, however, reported a 40 percent increase in third-quarter net income
to $108.7 million, or 75 cents per diluted share, on Thursday, reflecting the fact that
most of its rigs operated at rates negotiated long before rig rates turned weaker. In the
year-ago third quarter, the Houston-based company earned $77.8 million, or 54 cents
per diluted share.
Diamond Offshore's President Larry Dickerson said earnings would be lower in the
fourth quarter, with shallow-water jack-up rigs that had been earning $40,000 a day in
the Gulf of Mexico having to bid for work at current market rates of around $20,000 or
less.
Dickerson said Diamond Offshore currently had five jack-ups ''stacked'' in the Gulf of
Mexico awaiting work and had also withdrawn two semi-submersible rigs from service
there.
''We don't think there's sufficient demand to employ all of the rigs in the Gulf of Mexico,''
said Dickerson, who also is Diamond Offshore's chief operating officer.
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