Y2K is nothing compared to what oil-service analysts have to do to prepare for the millennium.
The basic question they're facing in formulating earnings estimates for 2000 is how much money oil companies will spend -- under normal conditions a tough task, but coming out of an industry recession and with mergers multiplying, darn near impossible. It'll be five or six months before companies announce firm budgets. Spending estimates now have a Grand Canyon-like range from an increase of 6% to an increase of well over 20%, which translates into an equally wide gap between low and high earnings estimates for most oil-service companies.
For investors, this creates a tricky situation. Pros say look to the middle ground, where some estimates often are bunched more closely. In addition, earnings press releases and conference calls for the June quarter will likely include clues about next year.
This uncertainty carries even greater significance because expectations for the group are high. Year to date, it has climbed about 40% compared with about 10% for the broader market, with most of the gains coming since
March accord to cut production. Natural gas prices remain high, and crude oil has traded around $18 per barrel since March, increasing exploration and production company cash flow.
In the bullish scenario, oil demand growth increases about 2% per year, or about 1.5 million barrels per day. (In 1998, the Asian crisis led to a sluggish demand increase of 240,000 barrels per day.) And oil-company budget increases of 20%-plus will expand the need for drilling and associated services.
Some have already upped their 1999 budgets. Just Monday,
announced a 1999 capital increase to $880 million from $590 million. Although two-thirds of the increase is slated for acquisitions, there will be an additional $100 million slated for drilling and development plans.
are also mulling increases.
In the bearish scenario, capital spending on drilling and exploration grows much slower due to the diversion of funds to other purposes and the rate of merger activity. The number of planned or completed oil company mergers has probably never been higher, depressing overall spending.
"History has demonstrated that when companies
merge, drilling programs slow down, and when the mergers are completed, the combined company spends significantly less on exploration and production expenditures than the two firms individually spent as the companies 'high-grade' their prospects," wrote James Crandell, an analyst at
, in a recent report. He initiated coverage of the sector earlier this month with a neutral rating.
"In addition," he wrote, "because there are so many companies involved in mergers and these companies are partners with others that are not in mergers, these drilling plans also get slowed down -- thus even companies that are not involved in mergers tend to underspend budgets."
Crandell's estimates are among the lowest on the Street. For example, he estimates
will earn $1 per share in 2000. (Lehman has done underwriting for Halliburton.) The highest estimate is $2.50 from
. (Southeast has not performed underwriting for Halliburton.)
Several midrange estimates on Halliburton are in a tighter band of $1.20 to $1.45. The
consensus is $1.45.
The floodgates for earnings revisions for 2000 opened in May and June, says Chuck Hill, director of research at Boston-based First Call, months after oil prices lifted. The wider-than-usual gap between low and high estimates indicates a higher degree of uncertainty, Hill says, and isn't unusual during an industry transition. He compares the cyclicality and wide swings in estimates to the semiconductor-equipment sector, which lags the chip business.
"The biggest factor for
oil services is that it does lag the
upturn at oil companies," Hill says. "Obviously oil companies are not going to
increase budgets until they are sure oil prices can be sustained at current levels."
The ramifications of the earnings estimate gap for stock prices could be big. For instance, if
trades at its current trailing earnings multiple of 29, then based on the most bullish earnings forecast of $2.75 for next year's earnings, it could hit 79, almost 30% above its current price of 61 5/16. And if it trades off the current trailing multiple and the most bearish estimate of $1.28, it could hit 37, under its 52-week low.
So much can happen in the next year, it's no wonder the numbers are all over the place, says David Thompson, an energy analyst at Boston-based
Colonial Management Associates
. "If the majors come in and start spending like crazy," that will serve to suck up the extra service capacity. But right now, volatility reigns. The numbers "could be anywhere," he says.