Offshore Oilfield Stocks Rally

Offshore oilfield service stocks, to put it mildly, have endured a wild ride for much of 1999. The once high-flying sector actually hit the skids in concert with the late 1997 Asian financial crisis, and resultant plummet in oil prices. Despite a raging rally in oil pricing for much of the year, investors have cautiously approached the stocks. One reason for the caution is purely psychological, as too many investors have been burned too many times on the cyclical stocks. Another is political, as OPEC's current production restraints are eyed warily. Nevertheless, last Wednesday proved a boon to these companies collectively, as a bullish market for crude oil and refined oil products fueled strong gains for U.S. oilfield service and drilling stocks. The OSX index of oilfield service and drilling stocks closed 3.62 points, or 5.03 percent, higher at 75.57, compared with a gain of 10.15 points, or 0.72 percent, for the broadly based Standard & Poor's 500 index, which closed at 1413.32. So far this year, the OSX index, made up of the service companies and drilling contractors that help oil and gas companies find and extract hydrocarbons, has risen 47 percent, spurred on by this year's dramatic recovery in crude oil prices. That compares with a year-to-date gain for the S&P 500 of 15 percent, a marked reversal compared with last year when the S&P 500 chalked up an increase of 27 percent, while the OSX plummeted 55 percent, reflecting last year's collapse in oil prices. Big Gains For Crude And Gasoline Crude oil, gasoline and heating oil all posted big gains on the New York Mercantile Exchange on Wednesday after industry data showed a huge decline in oil and refined products stored in the U. S., the world's biggest oil consuming nation. Buoyed by this news, January crude oil futures in New York closed 63 cents higher at $26.36 a barrel, while January gasoline futures closed 15.4 cents firmer at 71.30 cents a gallon. The bullish tone in the oil markets gave energy stocks a boost, but as is often the case, the move was more pronounced for oilfield service and drilling stocks than for oil producers. Chevron Corp. closed up 2-2/16, or 2.4 percent, at 89-15/16, while Texaco Inc. gained 13/16, or 1.5 percent, at 54-1/16. Houston-based independent oil and gas producer Apache Corp. rose 1-3/16, or 3.5 percent, to 34-3/4. However, oil companies' gains paled in comparison with those chalked up by service companies and drilling contractors. Among service companies Halliburton Co. rose 2-2/16, or 6.1 percent, to 37-3/16, while Baker Hughes Inc. gained 1-7/16, or 7.9 percent, at 19-5/8. Offshore driller Noble Drilling Corp. closed up 1-9/16, or 6.1 percent, at 27-1/4. Oilfield Service Stocks Still Volatile "The oil service stocks tend to be more volatile than the exploration and production companies," said Roger Read an analyst with Houston-based Simmons & Co. "They tend to go up more and they tend to go down more." Read said oilfield service and drilling stocks would probably show choppy trading patterns through early 2000 as investors focused on winter weather conditions in the northern hemisphere and the possible lifting of OPEC oil production curbs. Attention will then likely shift to gauging the extent to which higher oil prices will boost oil companies' drilling budgets next year. Read expects bigger budgets to drive a marked improvement in earnings for service companies and drillers. "Earnings are going to be much better for these companies in 2000 than they were in 1999 and we anticipate that 2001 will be a better year again. That should allow these stocks to have another good year in 2000," he said. Oil Company Spending Plans On Tuesday, Lehman Brothers published a survey of spending plans by 320 oil companies that indicated their global drilling budgets will rise 10.2 percent next year. The survey indicates that gains of 15.7 percent in the U.S. and 28 percent in Canada will be offset by a relatively modest rise of 5.7 percent outside North America. Jim Wicklund, an analyst with Dain Rauscher Wessels, said in a research note the survey confirmed his own assessment of the outlook for the oilfield services and drilling industry. "The outlook for the sector remains bullish with expectations for North America to be strong. However, the international outlook calls for sluggish activity in the short term," he said. Wicklund said most oilfield service stocks had the potential to outperform the broader market in 2000, but said he currently preferred companies with relatively greater exposure to North America such as BJ Services Co. and Hanover Compressor Co. Read said he also favored stocks that would benefit most from the upturn in oil company spending in North America, such as service companies Smith International Inc. and Cooper Cameron Corp. and offshore drillers Global Marine Inc. and Noble Drilling Corp. - (Andrew Kelly, Reuters)