HOUSTON Oct. 1, 2007 (Dow Jones Newswires)
Higher oil prices have led to record highs for the oilfield services stock index, but it's not boom times for all companies in the sector.
In the past, higher prices for crude futures have lifted all the index's components, but this time around, some are seeing shallower gains or even falling stock prices.
Crude futures topped $80 a barrel on Sept. 18, and have for the most part stayed above that level since then, trading at $80.90 on Monday morning. The Oil Service Sector index (OSX) on the Philadelphia Stock Exchange, which aggregates 15 companies, crossed $300 for the first time in its 11-year history on Sept. 21. The two tend to rise and fall in tandem, as the price of oil eventually helps determine the amount of cash producers can use for exploration and production. In good times, services companies face increased competition for that extra business, with onshore and shallow-water drillers in particular seeing an onslaught of new rigs entering the market.
"It'll probably be anywhere from a six- to 36-month lag from a move in oil prices to an impact on services," said Roger Read, an analyst with Natixis Bleichroeder in Houston. "The (stock) market recognizes that in advance, so it makes sense stocks are moving to some extent on record oil prices."
The OSX isn't the monolith it once was, however. Shares of Cameron International Corp. (CAM), a global oilfield services provider, gained 20% over the last month, a slightly larger percentage increase than the price of oil. Similar companies, such as Halliburton Co. (HAL) and Schlumberger Ltd. (SLB), also saw healthy growth. At the other end of the index, Rowan Cos. (RDC), a shallow-water driller, saw shares fall 2% over the same period. Nabors Industries Ltd. (NBR), the lone land driller in the index, gained a relatively mild 5%.
Both Cameron and Rowan earn a healthy portion of their income in oil fields worldwide. But as their diverging fates show, $80 oil is not a cure-all for sore spots developing in some corners of the industry.
"You are having pushback from producers, you are seeing softness in drilling rig rates and in some of the service lines," said Read, who has set a $353 target price for the OSX in 2008.
Road To Riches
Back in 2004, $40 oil persuaded producers to greenlight far more projects than services companies could easily handle, which sent costs skyrocketing. A year later, $60 oil cemented an acute shortage of labor, rigs and other equipment. All of the companies, from Nabors drilling in Oklahoma to Transocean Inc. (RIG) miles off the coast of Brazil, benefited from rising oil prices.
The run-up to $80 from $60 this year hasn't lifted all stocks in the same way, with each component of the sector growing or suffering based on producers' actions and their own activities during the first three years of the boom.
Companies like Halliburton and Baker Hughes Inc. (BHI) help producers do everything from speed up the time it takes to drill a well, to extracting a bit more production out of aging reservoirs. Increasingly their work is outside North America, where national oil companies are using cash generated by high commodities prices to boost production and undertake huge exploration projects. For this reason, Halliburton opened a headquarters in Dubai earlier this year, and other larger services companies are expanding campuses abroad. All are hoping to boost international revenue enough to overcome a slowdown in the U.S. and Canada.
"We believe (Baker Hughes') investment in international infrastructure will start to yield better-than-expected results," Doug Becker, an analyst at Banc of America Securities, wrote in a note to clients.
Deepwater drillers are in a different race. Many of the most promising undeveloped fields are miles offshore, and for the last few years there haven't been enough rigs available to explore them all. Companies such as Transocean, Noble Corp. (NE) and Diamond Offshore Drilling Inc. (DO) have prospered. New rigs are starting to leave the shipyards, but most analysts give deepwater drillers another two or three years before supply catches up to demand.
"There doesn't seem to be any limitations on deepwater (drilling) at this point," Read said. "There doesn't seem to be anything capping service pricing power."
Drillers working in shallower water aren't having the same luck, and rising oil prices haven't changed that.
Like their peers further offshore, operators of rigs known as jackups saw business explode as oil passed $40 and $60. Unlike the drillships used to drill in 8,000 feet of water, jackups can be built relatively quickly and cheaply. More than 60 new shallow-water rigs will be available for work through the end of 2008, while nowhere near that number of jobs are expected to open up.
"Until customers move up their budgets significantly, the underlying assumptions" that the market is softening remain in place, said Poe Fratt, an analyst with A.G. Edwards in St. Louis. "They're bringing so much capacity into the market."
For $80 oil to have an impact on the jackup market, producers must first get used to the idea of higher oil prices, Fratt said. Most companies still pick projects based on oil prices around $40, or even the mid-$30s, he said.
Services companies with a large share of their business in North America face the same capacity problems as offshore drillers, but are hampered by a market tilted more toward natural gas than oil. Crude may have passed $80 a barrel, but gas futures plateaued around $7 a British thermal unit in 2006, and spent parts of the summer below $6. North American producers spend more on gas than oil, and announced cuts to their 2007 budgets at the start of the year, even as 300 new rigs were entering the market. Shares of Nabors, with the vast majority of its rigs operating in the U.S. and Canada, trade 20% below their level when gas prices peaked in December 2005, and have barely budged in the last month.
The OSX is more heavily tilted toward oil-focused companies like Transocean and Cameron, and has therefore been able to ignore the stable price of natural gas and shaky North American market.
"Energy is playing as market darling and OSX is the prettiest of the bunch," Dan Pickering of Tudor Pickering Energy wrote in a note to clients last week - while also cautioning the next day that shallow-water driller stocks are "dead money."
Copyright (c) 2007 Dow Jones & Company, Inc.
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