Great earnings. Sound fundamentals. Strong growth potential. Anticipation of high rig turnover rates. The buzzwords that should perk up oil service stocks are just not cutting it with investors.
Instead, investors are worried about large supply. The Asian economic problems are threatening to cut oil demand growth, Iraq may begin exporting billions of dollars worth of oil, and the threat of reduced capital expenditure budgets hovers overhead. And oil price forecasts for 1998 continue to be cut. The latest comes from
United Bank of Switzerland
analyst Mark Gilman, who reduced his 1998 oil forecast to $17.75 per barrel from $19.
The overall bearish reaction to several strong earnings releases from drilling and service companies sets up a decidedly negative atmosphere for the large-cap companies reporting next week, including
, which is set to report on Jan. 22, according to
. The fall in prices is more telling than the bullish calls from company executives. For the near-term, the investment community is just not buying the thesis that the oil drilling boom is as healthy as the industry says it is -- even though some money managers are picking up oil service and drilling stocks at bargain prices.
"Markets hate uncertainty, and we have a huge black hole over there called Asia," says Erik Gustafson, manager of the
Stein Roe Growth Stock Fund. As far as earnings reports for the recent quarter, "They're all going to be good because they're already made. The issue is one of perception and the unknown future."
reported record revenues and earnings for the quarter and the year ended December 31. Company execs had forecast higher turnover rates and near complete utilization for all its rigs, yet it wasn't enough to push the stock up at day's end. GLM closed at 20 3/4 Thursday, down 1/4, or just over 1%.
reported Tuesday, beat the street's expectations by 4 cents, and the stock closed unchanged.
closed down 7 1/2% Thursday after reporting undiluted earnings two cents higher than expectations. What's the deal?
An investor from a West Coast hedge fund addressed the dichotomy in an extended conference call with Global Marine management Thursday morning: "It doesn't do any good to say how good the numbers are when the stock is getting killed." The investor asked GLM management to share any conversations it has had with oil companies about dayrate negotiations and the shelving or postponing of new-build construction. "These are the issues that are critical going forward," he said. The point-blank question came after GLM's management team ran through the great year it had had in '97: net income of $270 million, or $1.58 a share, before special items, on revenue of $1.1 billion, compared with net income of $110 million, or 66 cents a share, on revenue of $681 million for 1996. Earnings grew 148% in 1997, but that rate is expected to slow to 30% in 1998 and 24% in 1999.
John G. Ryan, Global's president and COO, summed up the company's strong prospects as well as the dilemma facing the industry and its investors: "Every rig we're turning over we're turning over at a higher rate. Almost everything we have in the Gulf is booked till the middle of the year. Nothing in Africa or the North Sea is available this year. No one has canceled
contracts or is calling to ask what's going on. We're set until June across the world. What will happen in June if oil is under $16
per barrel I don't know."
The price of crude, which has hovered between $16 and $17 per barrel since early January, is crucial to confidence in the sector. Investors will also be paying close attention to any downward fluctuation in dayrates as well as daily rig counts, and for backlogs of orders at service or rig construction companies to drop down. "If any rig doesn't roll to some increase from its previous contract, it will send a strong statement to the whole sector," says Richard Hunter, an analyst at Houston-based
, commenting only on offshore rigs. He will also be paying close attention to oil company capital expenditure statements for 1998. Several have already released budgets, but many more are waiting to release budgets when they release their fourth-quarter earnings.
The general consensus is that if crude oil stays under $16 or falls close to $15 for an extended period of time, then oil companies, especially the smaller independent companies that cost out each project they drill, will scale back their exploration expenditures. C. R. Palmer, chairman and CEO of
, which reported an increase of 139% in 1997 net income Wednesday, said Thursday morning on
that he gives the long-term oil drop two months before it affects the capital expenditure budgets of exploration and production companies.
Fundamentally, it may take two months or longer before that price affects the industry, but "if oil goes to $15 the investment community is not going to wait to see how long it stays there," says an analyst at a New York-based hedge fund. Crude futures for February delivery edged up 17 cents to $16.47 in
New York Mercantile Exchange
trading Friday, but are up to $17.30 for June delivery.
Despite the short-term bearishness on the price of the commodity, long-term "the fundamentals are really good," says Bo McKenzie, an analyst at
Jefferies and Co.
in Houston. "Gulf dayrates are moving up, and the filing of well plans is going up," he says. The last cycle took 23 years to finish, he says, and we're roughly about two years into this cycle. Regardless of what may be diminishing demand from Asia for a few years, "you have to couple that with the underlying decline in reservoir life," he says.
"A lot of these companies are not as dependent on the price of oil as the market thinks they are," says Randall Haase, portfolio manager of the
Alliance Quasar Fund and a large shareholder of Parker Drilling. Haase, who has been an active investor in the sector since 1993, says he sold a lot of his offshore drilling holdings throughout the summer and fall but notes that they have come back down to attractive prices. They are now "much more of a buy than a sell," he says.
Eric Gustafson at
thinks so, too. "I am way long on Schlumberger,
FLC. They will make earnings and exceed estimates." What will change the fundamental picture for him, however, is if dayrates start coming down.
Click here for a closer look at the companies reporting this week.