Three oil exploration stocks set to surge – MoneyWeek

Butoverandabovetheoilmajors,thereisanothergroupofcompaniesfeelingevenhappieraboutcurrentevents–thoseinoilservices。

Thissector–comprisingeverythingfromcontractorswhocarryoutseismicsurveystoconsultantsandrigproviders–is“makinghay”astheoilgiants’profitstrickledowntheindustry,sayTraceyBolesandJohnPenmaninTheSundayTimes。

Somuchsothatmanyfirmsarereportingthatturnoverhasdoubledinayear,figuresthatevenShellandBPwouldbejealousof。

Theproblemforthemajorsisthat,althoughtheirprofitsmaybe“eye-watering”,theycannotspendthemoneyasquicklyastheywouldlikeonnewdevelopmentbecausethesectorissufferingfromalackofservices,equipmentandskilledworkers。

Thisbottleneck,duetolackofinvestmentinrecentyears,meansthatoilservicesfirmshaveasmuchworkastheycantake–andcanchargeaccordingly。

Theservicefirmsare“reapingtherewards”,saysJeffCorray,UKsenioroilandgaspartneratconsultantKPMG。

Butinspiteofthehighcosts,oilmajorsareturningonthespendingtaps。

Thisyear,BPplanstospend$15bnonexploration,productionandtherestofitsbusiness。

Whoexactlyistobenefit?

Seismic-surveycontractorssuchasSchlumbergerandHalliburtonarethefirsttobenefit,accordingtotheoil-servicesfirmPetrofac。

Ownersofoffshoredrillingplatforms,suchasRowan,arealso“amongthefirst”toprofitduringanoil-industryupturn,withthemostsophisticateddeep-waterdrillingrigscostingupto$500,000adaytohire,morethantripletheratetwoyearsago。

Thisisleadingtoaboominthesector。

Firmsarekeentoexpandandhavecashtospend,whichexplainstherecentwaveofconsolidation,saysKwanYukPanintheFT。

Theservicescompaniesdownthechainareevenbeginningtogobbleuptheoilfirmsthemselves,asinthecaseoftherecentacquisitionofRemingtonOilGasbyservicesfirmCalDiveInternationalinadealvaluedat$1。

4bn。

Anditismergersandacquisitionslikethisthataregoingtohelpkeepthesector–andtheoffshoredrillersinparticular–growingatsuchafastclip。

Overthelasttwoyears,theoffshoredrillingfirmshavedevelopedseemingly“limitless”pricingpower,saysAlanLaws,sectoranalystatMerrillLynch。

Thehugeriseinearningsgrowthandcashgenerationmeansthatinvestorsmusttakealonger-termviewtotheendofthedecadeto“trulycapture”thestory。

Sowhatofthefuture?

Themarketmayalreadybeexpectingcapitalspendingtoincrease,butwith66%moreengineeringandconstructiontendersoutstandingforoffshoreoilandgasprojectsthan12monthsago,MartijnRatsatMorganStanleybelievesthemarketwillstillbe“positivelysurprised”in2006-2007。

Afterthat,heforecaststhatoil-firmcapitalexpenditurewillcontinuetogrowby15%-25%ayearuntil“atleast”theendofthedecade,asoilfirmswithquicklyexpandingbalancesheetsdesperatelytrytofindandextractmoreoil。

Goodnewsforoilservicescompanies。

Thethreebestbetsinthesector

Europeanoilservicesstocksrose55%-70%during2005onthebackofhugeoilsectorspending,saysMorganStanley’sMartijnRats。

However,hestillexpects15%-30%furtherupside。

AmonghistoppicksareoffshoredrillerSaipem(SPE:GR,e15。

90)andengineeringfirmWoodGroup(WG,238p),bothofwhichherates“overweight”。

AmongSaipem’s“keyattractions”istheearningsgrowthfromoffshoredrilling,withratesmorethandoublingin2005alone。

Using15。

5timesashistargetp/eratio,hisnewpricetargetise20,27%abovethecurrentprice。

WoodGroup,ontheotherhand,hasbeenoneofthe“poorestperforming”oilservicesstocksgloballysinceJanuary2003becauseoftheweaknessinthedeepwaterengineeringandUSgasturbinemaintenancemarkets。

However,fundamentalsare“improvingrapidly”。

Themarketisstillnegative,butthisisnowunjustifiedandthetargetof280pmeansmorethan16%potentialupside。

OilservicesgroupHunting(HTGF,269p)indicatedrecentlythatahealthyorderbookandproductionbacklogshouldmeanthatitsresultsfortheyearto31Dec2005–tobereleasedon2March–willbe“aheadofcurrentmarketexpectations”,saysAfxnews。

com。

Thesharesarecurrentlyatrecordlevels,butwithdemandrisingrapidlyandoilandgascompaniesbudgeting“significant”spendingincreases,thecompanyis“wellpositioned”tobenefit。

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