NEW YORK (Dow Jones Newswires), October 21, 2008
Major oilfield service companies are reaffirming their ability to increase profits over the long term, a rebuttal to a sharp sell-off in their shares.
Oil service executives are making arguments that are broadly accepted in the energy world and investment community. Even as Lesar and Weatherford CEO Bernard Duroc-Danner gave their outlooks, Exxon and Chevron Corp. executives were telling investors that they don't plan to alter spending in response to lower oil prices.
But the strong long-term outlook does little to brighten what is shaping up to be a shaky first half of 2009. The credit market, which tightened dramatically just after the end of the third quarter, is now expected to limit economic growth worldwide next year. Oil prices are trading near a 14-month low as a result, and are near a level that would render some major projects uneconomical.
Crude futures settled 3.3% higher Monday at $74.25 a barrel on the New York Mercantile Exchange as the Organization of Petroleum Exporting Countries mulled an output cut.
No matter how they phrase it, service companies are facing the very real possibility of cuts to oilfield services spending worldwide for the first time in years.
"For those looking for near-term performance, we have no call" on whether to buy or sell shares in Schlumberger, wrote Bill Herbert, an analyst with Simmons & Co. "For those looking for a compelling long-term buy and hold, buy (Schlumberger)."
Even if spending holds steady overseas, service companies are almost certain to see significant reduction in work from natural gas producers in the U.S. and Canada, the world's largest market for oilfield services. About 10 companies have already announced cuts to 2009 budgets, almost all in the U.S., said Tim Probert, executive vice president for strategy and corporate development at Halliburton.
For now, service companies are responding by closely watching their spending in North America. Schlumberger reduced its 2008 total spending by $100 million, to $3.2 billion, while Weatherford will likely slash its global 2009 budget to between $1.5 billion and $2 billion, from $2.4 billion. Both Schlumberger and Halliburton said it is too early to say whether their 2009 budgets will be affected by the economic downturn.
Analysts expressed concern that cuts in 2009 could hamper Weatherford's ability to take advantage should the producers increase spending in 2010.
"That has more people concerned that if you go and you start to dip, it takes a long time to slow the train, but it also takes maybe even longer to start it up again," said Alan Laws, an analyst with Merrill Lynch & Co.
Copyright (c) 2008 Dow Jones & Company, Inc.
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