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Gold/Mining/Energy : Global Santa Fe (GSF) (formerly Global Marine) -- Ignore unavailable to you. Want to Upgrade?

To: Greg Jenkins who wrote (982)	10/23/1998 2:25:00 AM
From: Graham	Respond to of 2282

Thanks for your report Greg. hope you know some of us appreciate it. I Think it will be a long-term/slow gainer.

To: Greg Jenkins who wrote (982)	10/23/1998 2:45:00 AM
From: Greg Jenkins	Read Replies (1) \| Respond to of 2282

Here is the rest of the AG Edwards opinion regarding earnings. It is rather long: Conference Call Highlights: Drilling Management (Turnkey): -Due to the weak commodity price environment the number of wells drilled in the quarter fell to 12 from 26 last year. -Higher expenses were incurred for the quarter due to payment for rigs at higher than market rates. This problem should be rectified entering into the 4th quarter and 1999 due to the renegotiation of term contracts. These added expenses tacked on an additional $27 million in unnecessary expenses for the quarter. This strategic decision to sign term contracts paid off in 1997 but hurt in 1998. -GLM has seen a higher level of inquires for 4th quarter drilling. We expect that "well completion" could rise to about 18 wells from 12 seen this quarter. The question remains "what should we expect for 1999?". If gas prices continue to be strong and we see some strength in oil we could see a modest rebound in these numbers, but if oil remains lackluster we would expect flat to down results. -Turnkey typically accounts for only 15-20% of operating income. -Turnkey remains a "core copetency" for the company. GLM is the world's largest turnkey operator and has historically been highly successful in this segment. As the energy market environment improves this segment is an easy area to see improvements within. (turnkey drilling is paid based on "total well completion" versus on a "dayrate" basis. Turnkey drilling handles all phases of the drilling process for one bided lump sum. Margins and profitability are based on completing the project under budget.) Contract drilling (dayrate drilling): -Average dayrates rose for the quarter due to the addition of two new deepwater rigs. -Competitors have seen several low end shallow water rigs fall to break even levels. However, we believe the quality of GLM's rig fleet should help to prevent a similar scenario for the company. Recent bid rates for the company's rigs have been at substantial higher rates than break even levels. The company indicates that they do not believe rates will weaken any further for at "least the rest of the year", but "does not know what will happen in 1999". We believe 1999 will be driven by commodity prices and at this point there is no clear indication of the direction of prices and therefore, the underlying industry demand. Read QOPN oil service for a full discussion. -Deepwater rates continue to be strong for the most part. Weakness has been seen in the "low end" of the deepwater market. "Second generation" semisubmersibles those that drill in less than 1,000 feet of water, have begun to see dayrate deterioraton, although GLM is not exposed to this particular rig segment. -Based on the inquiry rate for both contract drilling and turnkey business, GLM "fully anticipates" 4th quarter to be stronger than third as seasonal demand picks up for the industry. -Regional markets, such as the North Sea, continues to show no signs of slowing, while the greatest weakness were seen in the US gulf of Mexico and West Africa. -Brazil's deepwater markets remain a question mark. Ultimately Brazil will be a hot spot for new deepwater drilling, thus helping to support higer dayrates worldwide, bu the question remains when will drilling begin. Current political issues cloud the timing of the start of drilling operations for 1999. A positive surprise for the industry would be to see these issues resolved and drilling begin during 1999, versus continued political haggling well into the year 2000. Other: -Corporate overhead expenses were down 32% due to the tying of executive compensation to the company's stock price. Recall that one of the reasons GLM's new CEO Robert Rose left Diamond Offshore was his desire to have exposure to he equity markets. We believe that ultimately this is an indication of his positive long term view of the oil service industry. Rose joined GLM earlier this year. Conclusion: Global Marine ended the call by stating that they are on track for having the 2nd best year in its history; that they continue to build contract backlog with revenues in excess of $1.5 billion; and that 1999 remains uncertain with as many positive indicators as there are negative. As recently discussed in "QOPN oil service", we also believe that 1999 remains uncertain. Overall, the year is likely to be a year of "transition", as the industry recovers from the carnage seen in 1998. The length of the industry's recovery process is dependent upon the timing and magnitude of the recovery in oil prices. At this point with continued global economic weakness, and the uncertianty surrounding further OPEC production cuts its is difficult to forecast the "turn" for this industry. We couold just as easily see a recovery late 1999 as early 1999. The group offers compelling valuation levels, but also a cloudy near term outlook. Investors entering the sector at this time must be willing to patiently await the turn in the industry and oil prices. We believe that the aberration in oil will ultimately self correct and that the underlying demand for drilling rigs remain longer term. However, we have destinctly entered an industry down turn and the timing of the recovery process still remains uncertain. In other words, traders should look elsewhere for opportunities and long term investors should continue to see appeal As GLM carries the greatest exposure to the shallow water sector, the company could likely see lower earnings next year if the energy industry remains stagnate. At this time we are predicting only a very moderate increase in earnings. Due to the short term nature of GLM's contracts the company has a great deal of latitude for dayrate moves and thus earnings. With the still weak commodity price environment our favorite continues to be Transocean Offshore. We strongly suggest for those investors playing this sector that they do so by buying several names, versus over leveraging to only one story. -------------------------------------------------------------------- That is all and I am going to bed. Any comments? Greg J.