Stocks of Oil Field Services Firms Soar
If you’d been smart enough--or lucky enough--to buy stock in oil field services giant Halliburton Inc. one year ago, you’d be sitting on a 55% paper profit right now.
An even better pick would have been Baker Hughes Inc.: Your gain at this point would be 70%. And you’d probably have a tough time keeping that to yourself around the office.
The question now: Is there an encore for these stocks? Or has all the money been made?
Not surprisingly in an otherwise bleak market, Wall Street is desperate for winners--and oil and natural gas firms, and those that service them, fill the bill. Many analysts say you can’t go wrong buying now, if your view stretches to the mid-’90s.
Five years after the price of oil collapsed under the weight of a huge glut, global demand for oil and gas is rising sharply. Oil and gas prices have rebounded enough to revive exploration worldwide. Profits at many oil-sector companies are surging. And the stocks, stellar performers in 1989, have continued to soar this year.
Fred Mills, an analyst at Lovett, Underwood, Neuhaus & Webb in Dallas, admits that the buying has the look of a “feeding frenzy.” He worries that it may have gotten out of hand temporarily--and in fact, the stocks were hit by a round of profit taking late Thursday.
What’s worrisome: The second quarter, Mills said, “will put oil prices to the test” as the winter heating season ends.
Oil has been trading around $22 a barrel since year-end, up from $17 a year ago. A slump in the price this spring could unnerve the many investors who believe that oil and gas supply and demand finally are back in sync, after years of glut.
But if investors have been wrong to bet on an oil revival, a lot of oil executives also will be wrong. Shaking off years of pessimism, they are committing massive sums for exploration, upgrading of refineries and other major projects.
That’s one reason why many investors have focused on oil field services firms rather than on oil and gas producers. The old line is, when someone strikes gold, first buy stock in companies that make shovels. The oil field firms are the shovel providers: They do the drilling, provide equipment used to search for new fields, make pipeline valves and provide safety services, among other things.
The services industry was devastated in the late ‘80s. The survivors, such as Halliburton, Baker Hughes and Daniel Industries, slashed costs and streamlined their operations to stay afloat. Now, they stand to make big money off even a modest rise in business, analysts say.
But how much of those profits are already reflected in the stocks? A lot, probably. Consider: At $45.125 a share, Halliburton, a $6-billion (sales) firm, is trading for 30 times the $1.50 a share it should earn this year. That’s nosebleed territory.
So why buy now? Jerry Mill, who runs the $15-million Financial Programs Energy mutual fund in Denver, puts it this way: “The best is yet to come. We’re in a secular up-trend in energy that’s probably going to last five or more years.”
And that’s a key point: The oil business always has been cyclical. Up cycles inevitably follow down cycles. After the ‘80s shakeout, energy is due for a rebound. In the 1971-80 oil boom, Halliburton soared from $8 to $87.
This time? Who knows.
Worth buying now: Here are some of the ways big investors are playing the oil and gas and oil field services industries:
* Mill of Financial Programs favors Houston-based Baker Hughes, one of the leading firms in the hot field of horizontal drilling. Rather than drill straight down for oil and gas pockets--a hit-or-miss technique--horizontal drilling allows exploration across a far greater area. “It’s really come on just in the last year or two,” Mill said. Baker also stands to benefit from its major presence overseas, which is where most U.S. oil firms are concentrating exploration.
* Lovett’s Mills is betting on Oceaneering International and Galveston-Houston. They specialize in safety services for offshore drillers. Oceaneering, for example, provides robots for underwater rig inspections. Galveston-Houston makes valve actuators that control pipeline flows. For environmental and safety reasons, rig inspections and repairs “will be much more frequent in the 1990s,” Mills said.
* Analyst Craig Schwerdt of Seidler Amdec Securities in Los Angeles admits that he missed the big move in oil field services stocks last year. To play the new energy cycle now, he said, “I’d rather buy oil and gas resources in the ground” than the services firms. His favorites: Phillips Petroleum, “the cheapest (big oil) stock on a price-to-cash-flow basis,” and Dekalb Energy, a two- to three-year bet on rising natural gas prices. Dekalb has huge cheap reserves in Canada that could be tapped for U.S. markets.
Also among oil and gas producers, Los Angeles-based Unocal has been winning new fans. Mill likes Unocal “for its assets, refining and marketing operations and its distribution system” in the ever-growing California market.
Rykoff fan: L.A.-based Rykoff-Sexton, a major wholesale food distributor, shocked investors Feb. 8 when it said earnings in the latest quarter would be about 5 cents a share, versus 38 cents a year ago. The stock lost $5 to $16.875 that day and has been flat since. It closed Thursday at $16.125.
Now comes the Wisconsin Investment Board, the $10-billion pension fund for public employees in that state, arguing that Rykoff is a bargain: Since Feb. 8, the fund has raised its stake by 200,000 shares to 954,600 and now owns 8.1% of the firm.
John Nelson, fund investment director, said he believes Rykoff’s problems (some brought on by a business slump in Northern California, after the October earthquake) are temporary. He called Rykoff’s prospects “very good for the long run.”
WAYS TO PLAY AN OIL & GAS REVIVAL
Here are details on some oil and gas companies and oilfield service stocks, including estimates of 1990 earnings per share and the stocks’ price-earnings ratios based on those estimates.
52-week Thurs. % rise Est. ’90 Est. Stock range ($) close from low EPS P-E Oceaneering International 12 1/8-3 1/8 11 5/8 +272% $0.75 16 Galveston-Houston 6 7/8-1 7/8 6 +220% $0.47 13 Rowan Cos. 14-6 12 3/4 +113% $0.30 43 Baker Hughes 27 5/8-14 7/8 26 +75% $1.05 25 Ocean Drilling 27 3/8-16 27 +69% $0.65 42 Dekalb Energy 34 1/4-18 1/2 30 1/2 +65% $1.05 29 Halliburton 47-27 5/8 45 1/8 +63% $1.50 30 Unocal 32 1/8-20 1/8 30 1/8 +50% $1.35 22 Daniel Industries 17 3/8-11 1/4 16 1/2 +47% $0.90 18 Schlumberger 50 1/2-34 3/4 48 1/2 +40% $2.20 22 Dresser Industries 48-33 1/2 45 1/2 +36% $3.00 15 Phillips Petroleum 30 1/8-21 1/8 26 +23% $2.00 13 Source: Value Line Investment Survey and Lovett, Underwood (EPS estimates)
