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5 companies pumped up by oil prices
Oil companies are spending to get more oil from existing wells, aiding oil service and equipment companies. And these stocks have pulled back recently, giving investors opportunities.
By Jim Jubak
Follow the money.
That's pretty good advice if youre investigating the Watergate scandal, handicapping the American League Championship Series or picking oil service stocks.
So where's the money going in the oil service sector these days of $50-plus oil?
Not where youd think. Despite the pile of extra cash that oil companies have collected as oil soared to north of $50 a barrel from $20, spending on exploration, the hard work needed to find new oil, has actually tumbled. According to industry consultants Wood Mackenzie, exploration spending by the 10 largest publicly traded Western oil companies, dropped by 27% from 1998 to 2003.
In contrast, development spending -- money spent to get already discovered oil out of the ground -- has soared to record levels, climbing 43% in the same period.
And the tilt toward development has gotten even steeper this year. Oil companies have upped their spending in mature fields as prices climbed. With oil at $50 a barrel, every extra spoonful that a company can wring out of an established well pays. In the Permian Basis of Texas, for example, where production has been falling for 30 years, Occidental Petroleum (OXY, news, msgs) this year is increasing its spending by 50%.
So money is flowing to the oil service and equipment companies that specialize in the mundane stuff that gets more oil out of the ground, whether that stuff is steel tubing, pressure values or the proppant used to fracture rock to release more oil.
Stocks in the oil service and equipment sector have pulled back with the decline in oil prices from $54 a share. The three I recommended during my 11:20 a.m. ET appearance Wednesday on CNBCs "Morning Call" all have dropped back toward the middle of their price channels from their tops, making this a reasonable time to follow those oil dollars into the sector.
A dominate position
National-Oilwell (NOI, news, msgs) estimates that 90% of the worlds mobile offshore drilling rigs and more than 50% of its larger land rigs use its drilling components. Those drawworks, mud pumps, power swivels, solids control equipment and rotary tables are installed on new rigs and then replaced as rigs are upgraded or refurbished, exactly what the industry is doing now to get more out of existing fields.
While the companys long-term growth strategy looks to international markets, the companys main strength now is in North America. And thats just fine with me since thats where the rig count is growing fastest. Drilling permits for the 30 states that Lehman Brothers tracks climbed 13% in September.
This stocks chart is a good example of the favorable pattern Im looking for in the sector. In the last two weeks the stock has dropped from the top of its price channel to near the middle, while remaining above support at the 50-day moving average. The longer-term trend, which you can see in the 200-day moving average, remains solidly upward.
On the fundamental side, operating margins expanded by two percentage points in the second quarter from the first and look likely to expand into 2005. The Wall Street consensus projects that earnings per share will grow by 72% in 2005 to $1.83 a share from $1.06 this year. The stock recently traded at 17.6 times projected 2005 earnings per share. Our StockScouter rated National-Oilwell shares a 3 out of a possible 10 on Oct. 20.
The right place
Oil States International (OIS, news, msgs) acquired several tool rental companies in South Texas in January. Add those to the companys existing tool rental business and this provider of tubular and well-site services seems to be in the right place at the right time.
Wall Street is projecting that earnings per share will grow by 36% in the fourth quarter, driving earnings growth for the year to 22%. The shares trade at a modest multiple of 16.5 times projected 2004 earnings and 14.3 times projected 2005 earnings. Like National-Oilwell, Oil States shares have pulled back from the top of their price channel but remain comfortably above support at the 50-day moving average. Both the 50-day and the 200-day moving averages show solid upward trends. Our StockScouter rated the shares a 6.
The business of fracturing
Carbo Ceramics (CRR, news, msgs) is a kingpin in the fracture market. In fracturing, an oil company shoots a proppant under pressure down an oil well to fracture the rock that holds oil, enabling it to flow more freely into the well. Carbo is a dominant maker of ceramic proppant, which is taking market share from traditional sand proppants because it works better. The company also provides fracture services: Carbo sells fracture diagnostic, mapping and fracture design services as well as fracture simulation software.
Wall Street projects earnings per share growth of 33% this year. The shares trade at 28.3 times projected 2004 earnings and 25.2 times projected 2005 earnings. Our StockScouter rated the shares a 10 on Oct. 20.
And as always I have two exclusive picks for the readers of CNBC.com on MSN. With these picks Im looking a little further out to the trends in oil and gas exploration and production budgets that are emerging rather than those that are already in action.
In the last few months, the daily rates that oil companies pay to lease a deepwater drilling rig have started to climb. This month, for example, BHP Billiton (BHP, news, msgs) contracted to pay $215,000 a day for a deepwater drilling rig in the Gulf of Mexico. Thats significant increase from the going rate of $180,000 a few months ago.
Rising rates
Transocean (RIG, news, msgs) shows what rising day rates can do. The company recent reactivated its Sedco 712 rig at a day rate of $103,000, up from $40,000 on its last lease. The Discoverer Pathfinder drill ship recently went on lease for $195,000, up from $175,000. It's no wonder then that the fourth quarter looks like the turning point for the companys earnings. Wall Street projects a 153% increase from a year earlier. For 2005, the company is expected to earn $1.07 a share, a 132% increase from the 46 cents projected for this year.
The recent rate increases still leave lease rates well short of the peak in 1997, the top of the last cycle. Lehman Brothers estimates that at 1997 levels, the company would earn close to $5.70 a share.
The stock trades at 74 times projected 2005 earnings per share, exactly the kind of out-of-sight multiple thats typical of a cyclical stock at the turn in the cycle. At the peak of the earnings cycle, the price-to-earnings ratio has historically been near 10. In the topsy-turvy world of cyclicals, however, that low price-to-earnings ratio is a sell signal.
Cautious investors might want to wait to buy until after the companys Tuesday earnings report, when it could guide fourth-quarter earnings lower as a result of lease revenue lost to the Norwegian oil workers strike. Our StockScouter rated the shares an 8 on Oct. 20.
Small size, big opportunity
Atwood Oceanics (ATW, news, msgs) gives you more pop for your investing buck (and more risk) because of its size. As a small-cap stock with a market capitalization of just $664 million, the shares move fast on any improvement in fundamentals. As a company with just eight deepwater rigs, any improvement in day-lease rates usually leads to a big swing in earnings per share. And thats whats scheduled to happen over the next year.
Earnings per share grew by a projected 148% in the fiscal year that ended Sept. 30 and another 192% in fiscal 2005. The stock trades at nearly 38 times projected fiscal 2005 earnings. Thats just a bit less than the price-to-earnings ratio of 42 the stock hit during the worst of its earnings slump in the last five years and a long way from the P/E ratio of eight the stock commanded at its earnings peak. (Remember, this is a cyclical so the P/E ratio falls as the company approaches its earnings peak.) Our StockScouter rated the shares a 10 on Oct. 20.
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 shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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