GET OUT OF OIL DRILLERS NOW !!!
Steve
They were star performers last year, and they've come on again lately. But that doesn't mean
investors should look for oil-drilling and service stocks to surge again anytime soon.
That's the word from analysts.
I N V E S T O R ' S C O R N E R
Oil stocks carry high expectations these days. After all, they came out of nowhere last year to
be one of the market's top groups. Issues like Schlumberger Ltd., Global Marine Inc., Transocean
Offshore Inc., and Cliffs Drilling Co. leapt from 50% to more than 400%.
This year, they've been battered like rigs in a stormy sea. Many have slumped 20% to 30% from
their mid-January peaks. Rumors held that the Fidelity funds were selling and that momentum players,
who moved into the group ferociously late last year, ran for the exits.
Beginning two weeks ago, the sector rallied back from its oversold condition. Schlumberger, for
instance, rebounded 10 points to about 110, and Transocean 9 to roughly 60. Cliffs bounced up 12 to
61 but has since settled back to about 53.
Most analysts doubt the rebound will last.
''The oil-service stocks carried a lot of money managers last year,'' said Charles White, a
managing director at Avatar Associates of New York, which runs $4 billion. ''They were up
parabolically. This year, the momentum guys came flying out of them.''
The latest gains were spurred by a short-term factors like a favorable offshore lease sale for
the Gulf of Mexico, a recommendation by Bear, Stearns & Co. and short-covering.
''My gut feeling is the oil-service and drilling stocks tried to recover too quickly,'' said
analyst Jeffrey R. Freedman of Prudential Securities Inc.
''The lease sale created a broad level of interest. I don't expect the move to continue
near-term. However, further out, I think the group will do well because demand for oil services will
be high for several years.''
Petroleum companies made bids two weeks ago of $1.2 billion for drilling rights in the central
Gulf of Mexico. Analysts said it was the best show of interest in the Gulf since 1985, when $1.5
billion was bid. Many bids were for deep-water tracts that provide special tax breaks.
''For years, oil-service stocks were great trading vehicles, but poor investments,'' White
said. ''We think oil-exploration budgets are rising. So we're favorably disposed toward the group.''
The bounce in oil services was aided by a renewed belief that crude oil prices will remain over
$17 a barrel and will continue to encourage exploration, said analyst George J. Gaspar of Robert W.
Baird & Co.
''Crude appears to be building a support level around $20 a barrel,'' Gaspar said. ''We
envision two months of backing and filling. Thus, we think oil-service stocks will continue to
consolidate for a few months. The fundamentals for the group remain strong. We look for a push
higher in the price of the stocks in the second half.''
Seasonally, Gaspar said, February and March are weak for oil-service issues. They usually trade
down after winter rallies as oil prices come down when the weather turns warmer.
Gaspar favors Pride Petroleum Services Inc., Global Marine Inc., Rowan Cos. and Smith
International Inc.
Going out 12 months, he sees Pride rising to 25 to 28 from 18 1/2. This year, the Street
projects a 53% jump in Pride's earnings to $1.15 a share. The stock has a 96 Earnings Per Share
rank.
Gaspar sees Global Marine climbing to 25-28 from 20, Rowan to 28-30 from 22 and Smith to 50-55
from 45. The group's earnings outlook for the next two years is healthy, he said. But the group
doesn't carry enormous price-earnings ratios. He thinks investors can jump in now because it'll be
hard to pinpoint the bottom.
Yves C. Siegel, an analyst at Smith Barney Inc., said, ''I think the oil-drilling and service
stocks have bottomed and will do fine. They'll remain a volatile group due to the type of investors
involved in them. The major risk with them is more in regards to the trend of the stock market.''
Service stocks are thought to mimic swings in commodity prices, but that's not true, Siegel
said. As long as oil and gas prices stay within a range, the stocks can be fine. Oil must stay
within a range of $18 to $22 a barrel, and gas around $2 per million BTUs, he said.
Most exploration budgets at major oil firms are in place and won't change much, Siegel said.
The big driver for the industry is strong demand for oil and gas worldwide. When oil hit $25 a
barrel and it looked as if it were heading for $30, there was a risk of choking off demand.
The successful bid sale for the Gulf of Mexico affirms the offshore market should be strong for
the foreseeable future, he noted. The offshore drilling firms should do well because they make more
with offshore rigs than those on land. Also, deep offshore drilling requires higher-quality
products.
''Earnings growth for oil-service firms will moderate, but should remain at double- digit
(levels) because of their operating leverage,'' Siegel said.
But investors shouldn't consider oil-service stocks a growth industry, he cautioned. The sector
is still cyclical and is in the third year of an up cycle. Keep in mind there'd been 15 years of a
bear market. This up cycle could last five to 10 years, he said.
Siegel views Schlumberger as the bellwether. He thinks the stock can hit 130 to 150 in 18
months. Wall Street now sees earnings rising 30% this year to $4.50 a share and 21% next year to
$5.45.
He thinks Transocean can reach 80 in 12 months. He also sees Halliburton Co. climbing to 80 in
12 months from 67, Dresser Industries Inc. to 45 from 30 and Ensco International Inc. to 63 from 46.
Next month, the annual Offshore Technology Conference will be held in Houston. Analysts say
it's a good source of information on the industry and should be well-attended.
////////////////////////////////////////////////////////////
Copyright (c) 1997 Investors Business Daily, All rights reserved.
Investor's Business Daily - Investor's Corner (03/17/97)
Oil Drilling And Service Stocks Need Time To Refuel
By Leo Fasciocco
Transmitted: 3/14/97 9:11 PM (u1afn9li)
Thank You to all who reply,
\\\\\|/////
o o )
-------------------oOOo-----(_)-----oOOo---------------------------
Steve
sn...@pipeline.com
---------------------------------------Oooo------------------------------
oooO ( )
( ) ) /
\ ( (_/
\_)
=====================================================
NOTICE TO BULK E-MAILERS: Pursuant to US JCode, Title 47, Chapter 5,
Subchapter II, 227, any and all non-solicited commercial E-Mail sent to
this address is subject to a download and archival fee in the amount of
$500US.
E-Mailing denotes acceptance of these terms.
=====================================================
AJC911
I wouldn't
Certain oil related companies look good
Halliburton
Schlumberger
Reading & Bates
NUMAR (OTC)
Don't take my word for it
Nobody has a crystal ball, including me.
But my intuition has usually been correct
So just use play money
Invest 1000 bucks of play money now
in each of these stocks (versus putting the $4000 in a S&P 500
index fund). Let's see at the end of 1997 who comes out ahead!!
(ignore management fees etc. to keep it simple)