Lagging oil-service industry may rebound early next year
For the past three weeks, investors have been drilling for profits in the oil-service stocks. The catalyst behind this rush into an industry that has not performed as well as the stock market was the government's giant lease sale in the Gulf of Mexico. At this sale last week the major oil companies plunked down a record $3.47 billion in bids for the leases.Skip to next paragraph
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Even though some traders cashed in their profits once the results of the sale were announced, analysts who cover the industry say they believe the sale should help companies specializing in offshore drilling pull out of the doldrums.
John Wellemeyer, analyst and managing director at Morgan Stanley & Co., notes the government intends to hold two more lease sales this year. He says by year-end there could be 1,000 new leases sold in the gulf. Currently, there are 1,700 leases outstanding.
At the same time, Mr. Wellemeyer says, the British government has proposed lowering the tax rate on some of the smaller oil fields in the North Sea. Since this will increase the return for the oil companies, it might also stimulate drilling in fields where there currently is no development planned.
And the Chinese are opening up offshore areas. Eventually, this will result in more demand for offshore drilling equipment.
Summing up, Mr. Wellemeyer says, ''I don't think we've ever had a time when so much was going on except when the North Sea was first discovered.'' However, he adds, ''We've also never had a time of so much surplus capacity in the offshore-rig fleet.''
In fact, John H. Hayward Jr., vice-president for Merrill Lynch & Co., say he expects this quarter will be the worst of the year as far as earnings comparisons go, except for the companies that are insulated by long-term contracts. By the fourth quarter of this year, he adds, ''I suspect that operating rates will bottom out.''
It would not be unusual for the stocks to anticipate this early. A. Jack Linder, an analyst with Dean Witter Reynolds Inc., says he drew a chart relating the stocks of major oil-field service companies and their relative price-to-earnings ratios to the Hughes rig count - the number of working oil rigs. ''We found that investors lead improvement in the rig count by a year,'' he comments. If this were to hold true in coming months, oil field companies would start to see some improvement in the first quarter of 1984.
If this is the low quarter, Mr. Hayward says, this might be the time to buy them, as in any cyclical industry. ''With drilling and day rates stabilizing in here and a pending gas shortage, or at least the end of the gas bubble, 1985 could be a good year.'' He rates the drilling companies as favorable purchases over the intermediate-to-long term.
Mr. Wellemeyer is also bullish on the group and particularly likes Murphy Oil , Odeco, Rowan Companies, SEDCO, and Tidewater Inc. In addition, he likes Halliburton and Schlumberger, both considered premier companies in the drilling business.
Where is Sherlock Holmes when we need him?
Watson, there's some sort of intrigue going on at the London Metals Exchange (LME). Over the past two to three months, someone - and we think it's the Russians - have been busy buying tons of silver.