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

To: ForYourEyesOnly who wrote (35049)	1/14/1999 9:26:00 AM
From: Platter	Read Replies (1) \| Respond to of 95453

This week's topic: Oil Drillers Panelist Fred Mutalibov, Vice President, Oil Field Services Research at Southwest Research Angeline M. Sedita , Oilfield Service Analyst at AG Edwards Q&A Briefing: Do you expect to see increased consolidation among the oil drillers this year? Who are the likely targets? Fred Mutalibov: Yes, we expect the consolidation in this group to continue as cost cutting remains a primary focus of oilfield service companies. Offshore drilling companies save on operating cost by cold stacking a large number of rigs simultaneously. WE believe that a good example of cold-stacking driven consolidation was a recent merger between R&B Falcon Corp. (FLC) and Cliffs Drilling Company (CLF). If offshore drilling fundamentals (rig dayrates/utilization) do not improve in the near future, we expect consolidation in this sector to accelerate. If offshore drilling fundamentals improve in the near future, the necessity to consolidate in the offshore drilling sector should diminish. We need to see around $17 per barrel in crude oil prices (West Texas Intermediate benchmark) for these companies to begin to turn around and to take the pressure off the need to consolidate. When considering likely takeover targets it is useful to divide all offshore drilling companies in two groups - the Gulf of Mexico jackup contractors and the International deepwater contractors. The companies with significant shallow water operations in the Gulf of Mexico include Ensco International (ESV), Noble Drilling (NE), Rowan Companies (RDC), Global Marine (GLM), and Marine Drilling (MRL). If oil prices don't improve, we expect the number of players in this group to decrease. On the International deep water drilling side the companies include Diamond Offshore Drilling (DO), Atwood Oceanics (ATW), Transocean Offshore (RIG), and Santa Fe International (SDC). If the fundamentals don't improve, we may see one of these taken out by year-end. Angeline Sedita: We would expect to see a continuation of merger mania within the oilfield service industry. Cheap stock prices and punishingly low oil prices have spurred oil service companies to seek strength through size. Ideally the mergers will enhance revenue generation though filling gaps in product lines, broaden geographic exposure and reducing cost structures both in overhead and operational efficiencies. Most of the consolidation will focus on the service and equipment side of the industry. Potential acquirers or acquirerees include Smith International (SII), Global Marine (GLM), Marine Drilling (MRL), UTIEnergy (UTI), Atwood Oceanics (ATW), BJ Services (BJS). Briefing: When do you expect the oil drillers to hit a bottom with respect to earnings contraction? What factors will drive on earnings rebound? Fred Mutalibov: We expect the bottom in Q2 or Q3 of this year and look for offshore drilling fundamentals to improve. An earnings rebound though needs stable world wide GDP growth and cold weather to drive energy demand which will cause oil and gas companies to increase capital spending and refuel the drilling industry. The Asian economic crisis has had quite a negative impact on the oil industry. As a region, Asia is important to the oil industry because while it only consumes about 15% of world oil on an absolute basis, it accounted for the highest growth in energy consumption during the mid-1990s. We expect Asian economies to bottom out in the first half of this year, and then begin a gradual economic recovery. Angeline Sedita : We believe that the second quarter of 1999 will likely be the lowest point for earnings with somewhat of a flattening of earnings thereafter assuming oil prices remain weak. As oil prices recover we would expect to see a lag affect before the underlying oil service activity begins to significantly rebound. However, the stock prices within the sector tend to react before the move in oil service activity as the stocks tend to act as a leading indicator of oil prices and the health of the energy industry. Briefing: Do you think OPEC will take the steps necessary at it's March meeting to engender a sustained turnaround in oil prices? Fred Mutalibov: The contributing factors to the latest oil glut included Asia's upward cycle growth in the mid-Nineties followed by the economic crisis, increases in production from improved technology, a 10% production increase by OPEC, and a warm winter last year. So, an increase in production cuts by OPEC will be a positive factor for currently depressed oil prices. It looks like the OPEC meeting will be earlier than March - February 25 seems to be the current date. We will be looking to see if they actually agree to increase the existing production cuts and that there is at least an 85% adherence to those cuts. Along with the possible new production cuts by OPEC, we also anticipate a significant decline in world oil supply in 1999 based on anticipated cuts by private (not state-owned) oil and gas companies. This coupled with reductions by OPEC, should put upward pressure on oil prices. However, Iraq can be a significant addition to the current oil supply if the sanction against this country lifted any time soon. Although the mentioned reduction in the worldwide oil supply will be positive for crude oil prices, a stabilizing growth in energy demand is more critical for the prosperity of oilfield service companies. Angeline Sedita : Forecasting the actions of OPEC is always a difficult task. Of the 11 OPEC nations there are always a few that are anxious to make further cuts while others continue to over-produce (Iran, Venezuela) thereby discouraging further cuts by any nation. The new Venezuelan President Elect, Hugo Chavez, gives some hope as, contrary to the previous President, he has expressed public support of OPEC and a willingness to support oil prices through additional cuts. As the third largest OPEC producer it is critical to have the cooperation of Venezuela to encourage any further OPEC action. We are hopeful that we will see additional cuts, although would not be surprised to see the quarreling members return with a status quo decision. Briefing: Which stocks are you recommending/avoiding? Fred Mutalibov: We like large cap companies because they are relatively safe and they should be the first to rebound when oilfield service fundamentals improve. We like companies with low debt-to-capitalization ratio and that are trading close to their tangible book value. We like Santa Fe International (SDC/NYSE - $16 11/16) - rated ACCUMULATE - because it has zero debt and it had highest earnings visibility in 1998; Veritas DGC (VTS/NYSE - $15 3/16) - ACCUMULATE - because seismic companies are less sensitive to oil price swings than drilling companies; (BHI/NYSE - $19 11/16) - ACCUMULATE - because it is large enough to rebound when the sector's fundamentals improve. I would stay away from small-cap oilfield service companies with high debt load until there is a material and sustained improvement in oilfield service fundamentals. Angeline Sedita : Our top picks in the sector are Transocean Offshore (RIG), Schlumberger (SLB) and R&B Falcon (FLC), while we would avoid any small, over-leveraged oilfield service companies. Transocean Offshore offers investors exposure to the still relatively strong deep water offshore drilling market. Deep water drilling continues to be a high priority for most of the major oil companies despite the weak oil price environment. Long lead times and the potential for significant discoveries has encouraged continued drilling activity, however at a slower pace than what was seen in 1997/1998. Schlumberger is our large cap, bellwether of the group. As the largest oilfield service company in the world Schlumberger provides a broad range of products, services and geographic exposure. R&B Falcon is our last pick in the group simply due to cheap valuations. The company is the largest offshore driller in the world with both deepwater and shallow water drilling rigs. The company is aggressive expanding its deep water fleet and offers some of the better valuations in the group, although at a modestly higher risk ratio than our other two names. StreetBeat is designed to provide you with additional insights on the market from recognized financial experts on (and off) Wall Street. Please note that the views and opinions expressed by the panelists below are not necessarily those of Briefing.com.

To: ForYourEyesOnly who wrote (35049)	1/14/1999 10:05:00 AM
From: SliderOnTheBlack	Read Replies (3) \| Respond to of 95453

Internet problems & Crashes - Y2K may be bigger than thought... I'm reading of major problems with most major online systems. I'm having AOL crash, My online broker account with a ''top'' rated Online System - SUCKS !!! - either freezes up or I spend 2 minutes trying to get a simple quote, portfolio's will not print... If major Online state of the Art Brokers can't keep the system up on just a busy market week - what's going to happen at Y2K ? I'm pissssssssssed. Maybe buy the tech companies who can increase bandwith, speed - because no one has adequate systems & equipment here - we've surpassed the capacity of this ''state of the art'' junk...