Analysts comments on Oilfield sector on Feb 17 2006 and recommend to buy RES at its l
Analysts comments on Oilfield sector on Feb 17 2006 and recommend to buy RES at its low price.
RES's near-term prospects look bright eventhough recent pull back from its 52 weeks high. Based on its strong earnings in 2005, we believe the growth rate will continue in 2006 thanks to oil price surge and oilfield equipment market booming. We are holding our fair value for RES at $28 per share.
Industry review
The strong share-price advances of companies in the Oilfield Services/Equipment Industry last year have continued thus far in 2006. The sector's Timeliness ranking in the Value Line system is now 3 (of 98), up another notch since our prior report in November. Many oilfield services concerns are generating record earnings, and their share prices are hitting new highs. Bullish operating fundamentals are reflecting rising worldwide energy demand, coupled with record-high oil and natural gas prices, which have in turn prompted exploration and production (E&P) companies to boost capital spending on drilling and oilfield services.
Rig Utilization
The market for drilling rigs and vessels continues to tighten. Domestically, the number of rigs in service totaled 1,473 at the end of January, an increase of 218 from a year earlier. In Canada, the number of rigs in operation totaled 660, versus 550 in January of last year. Internationally, the number of rigs under contract and drilling totaled 905, according to the Baker Hughes-BHI International Rig Count. This is an improvement of 104 rigs from 12 months earlier. (Note: Due to rising political tensions, Baker Hughes has elected not to include in its international tally any rigs directly or indirectly under the control of the governments of Iran and Sudan.) The worldwide rig count is likely to continue to climb over the next few quarters, as demand and high oil and gas prices provide the incentives to drill for more hydrocarbons.
Oil And Gas Prices
Oilfield services/equipment companies provide drilling rigs and other ancillary products and services to integrated oil companies and E&Ps. Drilling activity has increased substantially because of growing energy demand and persistently high oil and natural gas prices. The trend continued in 2005, and expectations are for more of the same through 2006. Last year, the Energy Information Administration (EIA), which is part of the U.S. Department of Energy, came out with forecasts for oil prices to remain at least around $50 a barrel through the end of next year. It now appears that even this estimate may be a bit too conservative. The EIA also stated that OPEC's relatively low level of spare operating capacity provides very little room in the event of a sharp rise in demand or to cover a supply disruption. Too, the EIA does not believe that the output of non-OPEC producers will be sufficient to offset OPEC's shortage in spare capacity over the next two years.
Many names in the sector are posting their best operating results ever, due to oil prices and gas prices reaching all-time highs. The oilfield services firms are benefiting from the extra cash that the integrated oil and E&P companies have generated from high commodity prices, which has prompted greater spending on drilling activities. Moreover, the tightening supply of available rigs due to increased drilling has led to meaningful increases in dayrates.
These favorable conditions have led to a run-up in share prices of many stocks in the sector in recent months. Their P/E multiples have expanded a bit, but a windfall of profits has kept them below historical highs, as rising dayrates and growing demand for rigs continue to support strong profitability.
Investment Advice
Drilling companies are poised for solid results in the quarters ahead, backed by strong oil and natural gas prices and growing global economic expansion. The industry has benefited from increased rig utilization and higher rates charged for rig usage and ancillary products and services. This gives most stocks in the sector good Timeliness ranks. But many of these stocks have appreciated so sharply in such a short period of time that we question their attractiveness from here for capital gains potential out to 2008-2010. Nonetheless, we are in the midst of an extended up cycle in drilling activity that has shown few, if any, signs of slowing. We believe the progress will continue at least through the end of this year, and probably well into 2007. Investors should have in mind, though, the historically volatile nature of the Oilfield/Equipment Services Industry and the stocks that we track here.
