Jubak's Journal Recent articles: • What I would pay for Google, 8/10/2004 • Why Wall Street wants Google to fail, 8/6/2004 • 5 deep-value stocks, 8/4/2004 More... | Jubak's Journal 5 stocks taking advantage of oil prices Oil-service stocks are struggling, but don't believe the talk that they've peaked. Their cycle has room to run as big oil companies spend more. By Jim Jubak With oil trading around $45 a barrel, youd think oil service stocks, the shares of the companies that provide the pipes, pumps and software needed to get oil out of the ground, would be soaring. But last week, the Philadelphia Stock Exchange Oil Service Sector Index fell 6.2%. Whats up? How about disappointment that the major oil producing companies, while up to their hip boots in profits, didnt announce big increases in spending on finding new oil and gas? At Exxon Mobil And if capital spending is showing little life, then the market is saying that oil-service stocks have peaked. Add to that this piece of evidence of a peak for the stocks: The number of working oil and gas rigs in North America is up 92% from the April 2002 bottom and is just 6% below the top for the last cycle in January 2001. I disagree Well, I hate to argue with the markets, but I think the hesitancy by big oil to ramp up its capital spending is actually good news for the oil-service sector. I believe that capital spending is still inching up, instead of getting ready to pause after a gallop to the top, which means the cycle has further to go. Theres evidence for this. The 17 oil producers that Merrill Lynch tracks said in their recent quarterly reports that they would increase their capital spending plans for 2004 by 9% above earlier projections. The increase will bring the total capital spending increase for 2004 to 12% from 2003.
Because capital spending is only creeping up, the peak of the cycle for the oil-service stocks could be well into 2005 or even later. This cycle looks increasingly different from the last one. Production continues to grow, but at a rather modest rate. The growth isnt fast enough to give the world the 4% supply/demand surplus that past oil markets have needed to tame oil-price increases. Now, it looks like 2005 will see the supply margin edge up to 2%, but it may not be until 2006 or 2007 before the world against has that 4% breathing room. This cycle for the oil-service stocks looks likely to work its way above past peaks but to do so only gradually. World oil demand will keep spending on oil services rising, but constrained by the difficulties in finding new oil and gas, the move will be slower and more gradual than in past cycles. The search This week I looked for oil-service stocks that had pulled back along with the sector in the last week but that looked to have lots of headroom over the next six months. On CNBCs "Morning Call" at 11:20 a.m. ET on Wednesday I suggested these three stocks in the sector. Smith International, which provides drilling systems, production chemicals, drilling tools and supply-chain management for drilling equipment, saw oil-field revenues hit a record $1.06 billion in the second quarter. Earnings for the quarter came in at 47 cents per share, about 7% above the Wall Street consensus forecast. Management has projected earnings of $1.90 to $2 a share for 2004. The stock is trading at 27 to 28 times those figures. Revenue should grow another 5% in 2005, management has said. The stock was down 7% from Aug. 2 through Aug. 10. Our StockScouter rates Smith International a 9 out of 10. Too much pessimism The stock is trading at about 24 times projected 2004 earnings. That's expensive if you believe that growth will drop to 17% in 2005, but cheap if you think the cycle has longer to run. Certainly the results in Hydrils premium connections business, which sells products designed to get oil and gas from deep-water and deep-land wells, argue that 2005 estimates are low. For the second quarter, the premium connections division reported an 18% jump in revenue from the first quarter and record 32% operating margins. The stock was down 4% from Aug. 2 through Aug. 10. Our StockScouter rates Hydril a 10. The company is still seeing very slow bookings for its construction fleet of 22 ships and 25 remotely controlled vehicles thanks to slow growth in the Gulf of Mexico. Even very small improvements, like those the company saw between the first and second quarters will supercharge the bottom line. Revenues in this part of Cal Dives business were up just 1.4% quarter to quarter, but the gross profit margin climbed to 11.7% from 6.1%. The companys other business, oil and gas production, got most of its growth from higher oil and gas prices. For the second quarter, Cal Dive realized a price of $32.97 a barrel for its oil. But even this part of the company has room for improvement since the companys Gunnison and Marco Polo projects are still ramping toward full production. The stock was down 3% between Aug. 2 and Aug. 10. Our StockScouter rates Cal Dive International a 6. 2 exclusive picks for CNBC.com on MSN But its best days are ahead of it. Wall Street is projecting earnings growth of 68% in 2005. Theres good reason to believe those estimates. In the second quarter, the capital-equipment backlog rose to $441 million, a record high and up 21% from a year earlier. Orders climbed to $185 million, up 16% year-to-year. And theres reason to believe that Wall Streets estimates might be low. An increasing part of National-Oilwells business comes from oil producing countries such as Kazakhstan and China where its tough for analysts to collect accurate data. For example, National-Oilwell has announced a $150 million letter of intent to build two rigs and related drilling facilities in Kazakhstan. Our StockScouter rates National-Oilwell a 5. On July 22, the company signaled its confidence in its projections by instituting a quarterly dividend of 8 cents a share. With Wall Street projecting about $300 million in free cash flow for fiscal 2005, BJ Services can afford it. The shares were down 5% from Aug. 2 through Aug. 10. Our StockScouter rates BJ Services a 10. Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak did not own or control any shares in the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
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