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

To: Robert T. Quasius who wrote (45345)	5/24/1999 8:52:00 AM
From: Tomas	Read Replies (1) \| Respond to of 95453

Long-Term Deals Helped Oil-Service Companies Profit in a Difficult Year Houston Chronicle, May 22 Despite bottom-scraping oil and gas prices, eight offshore drilling and service companies were among the most profitable public companies in town last year. While many of the companies that depended on oil and gas exploration and production announced big losses last year as they wrote down their reserves, many service companies continued to turn profits. How did they do it? The service companies signed long-term leases during a period of prosperity at the end of 1997 that delayed the day when the profits vaporized. They husbanded that income stream with deep layoffs. Those contracts provided income for drillers, such as Atwood Oceanics, and Global Marine, which runs the equipment energy companies use to search for oil and gas. The safety net also extended to GulfMark Offshore, which handles towing, emergency services and other services for deepwater rigs, and Cal Dive International, an underwater service company that also salvages old drilling platforms and pipelines. "There's a lag in this business between the oil prices going down and the activity going down," said Stephen Smith, an oil analyst in Houston for Dain Rauscher Wessels in an interview in early May. "We're still two or three months out from seeing companies stop using rigs." The oil and gas service sector also had healthy returns on equity, which is determined by dividing a company's earnings per share by its book value, which is the difference between the company's assets and liabilities. However, continuing profits and a recent price rally did little to brighten Wall Street's gloomy view of the oil and gas exploration business. Declines in service stocks ranged from a 3 percent drop for Cal Dive for the 12 months ended April 30, to declines of around 40 percent for Atwood Oceanics and Global Marine during the 12-month period. That contributed to some of the energy-related companies ranked in the Chronicle's top 25 profitable companies posting less net income and profit growth last year than in 1997. Long-term leases range from one to five years. So, contracts are just now starting to run out and drillers are facing the hard choice of leaving rigs idle or running them for daily rates that are less than what it costs to operate them. "The declines have been ugly," said Phil Dodge, an energy analyst with Southeast Research Partners in Boca Raton, Fla. "In general, rig rates have declined 30 percent to 75 percent from their peaks." One of the hardest hit segments has been jack-up rigs -- drilling platforms with moveable legs that allow them to stand on the ocean floor in relatively shallow waters off the Outer Continental Shelf. Since drilling has dropped off more in the Gulf of Mexico than in deeper waters, the daily rates paid for jack-ups has gone down to $15,000 a day from as high as $80,000 a day in late 1997. But analysts predict the sharp upswing in oil and gas prices from the low teens to near $20 a barrel will pull the service sector out of this downturn soon. To stay profitable, major energy companies and exploration and production firms have to look for and extract oil and natural gas from the earth, says Michael Henzi, an analyst with Stephens Inc. in Boston. So when the prices gain some stability, rig rates will go back up. "If history is a guide, the nimble, larger independents will start drilling first and some of the majors and supermajors will start to put their toes into the water." But the recovery probably won't kick into full swing until fall or winter, the analysts predicted, and profits are unlikely while the industry waits. In the meantime, the service business -- which has eliminated 50,000 jobs to reduce operating expenses -- has to look for further cost reductions. "These drilling contractors run pretty lean," Henzi said. " There's not a lot of cost-cutting to be done, other than laying off people. " Cooper Cameron Corp., which makes, sells and services oil and gas equipment and ranked No. 24 on the highest return on equity list, cut its work force by 10 percent last year because of falling demand. But drilling contractors run the risk of losing a well-functioning rig crew when they take similar steps. Ultimately, the analysts said, 1999 should be a profitable year for the companies and their investors. But the continued high oil prices are hardly a sure thing and oil and gas companies won't increase their drilling budgets until they are. Which means people with a low tolerance for risk should put their money in a less messy industry. By the time the quarterly reports show profits, the best investing window will be closed.