Oil Stocks Rebound on Strong Lease Sale, Jump in Crude Prices

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Stronger-than-expected results in the Central Gulf lease sale and a sharp rebound in crude oil prices boosted flagging offshore drilling and oil service stocks Wednesday. But given the recent volatility in the sector, few investors were prepared to say the tide had turned for the better.

The auction's total of $810.4 million in high bids is less than the record of $824 million in high bids submitted in last year's Central Gulf sale, but well over the $616 million in high bids submitted in the most recent sale, held in August, for tracts in the Western Gulf. Eighty-seven companies competed for drilling rights offshore Louisiana, Mississippi and Alabama in Wednesday's sale, submitting closed bids on 794 tracts. Once again, interest in deepwater was most intense, accounting for fully 70% of the high bids submitted.

Stocks of oil service and offshore drilling companies with deepwater exposure were sharply higher throughout Wednesday's session.

Transocean Offshore

(RIG) - Get Report

jumped 3 3/16, or 7.4%, to 46 3/16,

Diamond Offshore

(DO) - Get Report

climbed 2 15/16, or 7%, to 43 15/16, while

Global Marine

(GLM)

, which is moving further into the deepwater arena with the construction of a second ultra-deepwater drilling unit, rose 2 3/16, or 10%, to 23 13/16.

The results "show that the cycle is continuing despite the fact that oil is at 13 or 14 dollars," says Dean DuMonthier, an analyst with the

(STCSX)

Strong Common Stock fund, which has about 10% of its fund in oil service and exploration and production stocks. "I think what this shows is that deepwater is the long-term play, with the kind of production that doesn't come on for a year or two."

In addition, the sale "put some heart back into the stocks," says John Cabell, co-manager of the

(USAUX) - Get Report

USAA Aggressive Growth fund. The crude market has been in disarray, he says, alluding to the four-month price slide and the much-publicized dispute between

OPEC's

top two producers, and an event like this illustrates that producers are taking a long-term view.

Major oil companies snapped up most of the leases, but it was the independent, or smaller, companies getting in the game and forking up the most cash for individual bids, according to a spokesman for the

Minerals Management Service

(MMS), which manages the biannual sales.

The pricing for winning bids varied widely. The big winners spent millions for dozens of tracts each, while the single highest bid, submitted by a division of

Sun Oil

(SUN) - Get Report

for a joint venture between Sun and

Statoil Exploration

, went for $28 million.

What's important to the oil companies is the number of winning bids, or the "capture rate."

Chevron

(CHV)

, for example, which submitted 86 high bids out of a possible 104, came out of the sale with a capture rate of 83%. Chevron was high bidder on 62 deepwater blocks out of 82 bids submitted, and on the shelf, the more shallow water, it was high bidder on 21 out of 22 blocks, spokesman Tom Garcia said.

"We've improved our competitive position in deepwater and we did it at a reasonable price," he added, referring to the $18.5 million in total high bids the company submitted.

As expected, the majors were the big players in the sale.

Conoco

shelled out $48.7 million for 122 high bids,

Shell Deepwater Development

, a unit of

Royal/Dutch

(RD)

, submitted 119 high bids for a total of $46.9 million, and

Mobil Oil and Exploration

, a unit of

Mobil

(MOB)

, submitted 118 high bids for a total of $62.8 million. Also on the top 10 company list of high bidders were large independents

Vastar Resources

(VRI)

and

Burlington Resources Offshore

(BR) - Get Report

. Vastar submitted 24 high bids for a total of $38.4 million while Burlington also submitted 24 high bids, for a total of $18.3 million. Each bid must pass MMS approval for fair market value before the leases are awarded.

A jump in crude prices, attributed to short covering as well as reports of an OPEC meeting this weekend possibly to stem the overproduction that has caused a slide to nine-year lows, coincided with the lease sale. But traders are skeptical whether the rally will last.

"Now the debate is whether it will rally another dollar," said Jim Fiedler, a senior vice president at

ED&F Man

, a commodities brokerage firm.

Indeed, even Cabell at USAA, who was buying "selectively" Wednesday morning, would not venture a guess on whether the day's events signaled a bottom in the crude market. "Trying to call commodity prices is like trying to call interest rates," he says.

For oil to make any firm movement upward, two things have to happen, says Dan Rice, manager of the

(SSGRX) - Get Report

State Street Research Global Natural Resources fund. The first is that Asian demand has to return, and the second is that Iraqi production under the current oil-for-food plan has to be accounted for. Rice, who was one of the first fund managers on the Street calling $15 oil months ago, says an oil price bottom will not be a "V-shaped" drop. Rather, "it will be a gradual saucer-shaped bottom," he says, with the new trading range when it finally does firm closer to $16 than to $18.