Speaking at the New York Society of Security Analysts’s 6th annual ‘Investing In The Energy Industry’ conference last month, Simmons & Co.’s Dan Pickering described a ‘favorable macro environment’ for the oil service industry.
This is due to OPEC’s success in maintaining an oil price in the $22-28 range (mostly) for the last 5 years. Moreover, down trending inventories are sparking a renewed drilling cycle—although Pickering describes the current cycle as ‘less explosive’ than previous booms and busts.
Service sector players are all giving significantly increased earnings per share guidance for 2004. Rises in the 25-50% range over current depressed levels are forecast. These rises are to be offset against falling earnings expectations from the analysts as a slower pace of recovery is factored in.
This cycle is also slower because of the Gulf War, a prospect ‘drought’, rising F&D costs and lower activity by majors. Excess capacity and a more discriminating Wall Street also have also contributed to slowing things down.
Pickering’s advice to investors? Oil Service Stocks are not particularly cheap but do offer strong growth opportunities and should be more familiar to investors by now. Key factors for the investor will be the duration of the current downturn and relative performance of the sector.
Pickering warns that ‘gassy stocks’ are unlikely to repeat 2001 performance and suggests that investors ponder whether ‘broken’ subsectors—including seismic—represent value, or a value trap. The Simmons crystal ball doesn’t help a lot here! But Pickering advises that the macro view is all-important, pointing out that ‘contrarians typically win’.
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