Oil field service company stocks outperformed the market during this year's first quarter, but their first quarter earnings were relatively dull by comparison, say analysts Donaldson, Lufkin & Jenrette.
Service stocks enjoyed a major rebound as commodity prices surged and company earnings showed signs of recovery. The weakening of technology stocks also played a part as investors shifted their assets to more traditional companies, the analysts noted.
In other company news, assets have changed hands in major deals in three South American countries, the Canadian merger frenzy continues apace, and growth continues at Louis Dreyfus Natural Gas Corp. with another major asset purchase.
Service-supplier earnings
The group "set a new benchmark" for outperformance during the first quarter, said DLJ, with stock values for land drillers up 65%. Deepwater drillers bypassed land drillers as their stocks gained 51% due to increased spending by the majors and an increased number of contracts for idle rigs. Stock prices for service-manufacturing companies and shallow-water drillers climbed 50% and 42%, respectively, while the stocks of offshore construction and seismic companies were up 35.2% and 34%. The large-capitalization, diversified group was up only 27%, however, dragged down by the poor performance of Halliburton Co.'s noncore businesses.
Despite the gains in stock prices, DLJ analysts Arvind S. Sanger and Stuart T. Kagel say they anticipate only modest gains in service company earnings for the first quarter vs. fourth quarter 1999.
Only a few companies-mostly a few "leveraged" names, says DLJ-enjoyed significant earnings benefits from strong US prices and strong activity and prices in Canada.
These stocks are trading at "significant trading multiples" to other companies with greater international leverage, which are likely to be only 1-2 quarters behind in their earnings rebound.
Year-to-year revenue and net income comparisons will likely remain negative for the first quarter. The analysts expect the large-cap group will show a 1% sequential decline in revenues and flat net income. Mid and small-cap companies will see a revenue decline of 3.6% but a net income improvement of 7.3%, helped by cost reductions and consolidation in the downturn. Sanger and Kagel said equipment contractors should see sequential revenues improve by 7.7% but have flat net income as international and deepwater contracts rolling to lower day rates offset newbuild start-ups and North American improvements.
(A table showing first quarter 2000 and fourth quarter 1999 earnings comparisons for selected service and supply companies is available on OGJ's free news site at www.ogjonline.com).
Peru asset transfer
Occidental Petroleum Corp. has begun the transfer of its oil field assets in Peru's northern jungle Block 1-AB to Pluspetrol SA, Buenos Aires, following approval from Peru's Energy and Mines Ministry on Apr. 18. The companies have ratified the transfer agreement, which has been in effect since last year. The agreement was announced initially in Peru on Dec. 17 by Energy and Mines Minister Jorge Chamot but has been awaiting government approval for the go-ahead.
A joint Oxy-Pluspetrol committee has begun an area-by-area transfer of the fields, which should be completed within 30 days. The transfer to Pluspetrol includes all personnel employed in the Block 1-AB.
Oxy will gradually reduce its Lima headquarters staff from about 70 to around 40 persons in the initial stage. Oxy, which has operated Block 1-AB since 1971, will be looking at new ventures in Peru. The company will continue its exploration activities on offshore Block Z-3 and to meet its exploration commitments on northern jungle Block 64 with ARCO. Block 64 is currently on hold because of differences with the native communities.
In the next step for the transfer, Pluspetrol will sign a new contract with state agency Perupetro SA for the operation of Block 1-AB. Pluspetrol has been operating Petroperu's former Block 8 in the Maranon basin, also in the northern jungle, since mid-1996. The block lies immediately south of Oxy's area.
Southern Cone deal
Repsol-YPF SA has signed an agreement with Petroleo Brasileiro SA that will allow both firms to acquire assets owned by the other, Repsol-YPF announced. The deal is expected to lead to a 20% reduction of Repsol-YPF's dominant share of the fuels market in Argentina, while giving it a solid toehold in the much larger Brazilian market. The Spanish-Argentine major did not say if Petrobras is about to let it obtain a minority stake in a refinery in southern Brazil, as had been rumored in recent weeks. Both sides set a June 30 deadline for placing a value on assets to be sold or swapped. Petrobras, in turn, will work with Repsol-YPF to raise its profile upstream in the other Southern Cone countries of South America (Argentina, Bolivia, Chile, Paraguay, and Uruguay). No further details were provided. Separately, the two firms signed an agreement to begin studying joint measures to increase their participation in new markets for natural gas in the Southern Cone, including supply for power generation.
Repsol-YPF has been under heavy pressure from the Argentine government to shed downstream assets in order to allow more competition in the aviation, diesel, and gasoline markets. Repsol-YPF has about a 50% market share and thus has taken much of the heat over the spike in fuels prices stemming from the runup in crude oil prices.
Energy Sec. Daniel Montamat blasted the refiner-marketers for their marketing practices, alleging there is no serious competition in Argentina's fuels market. Officials also have called on Repsol-YPF CEO Alfonso Cortina to honor his pledge to divest downstream assets belonging to the firm's Astra subsidiary, made prior to Repsol's purchase of YPF in May 1999. Argentina's President Fernando de la Rua looks favorably upon Petrobras's likely entry into the fuels market here, as he is anxious to promote bilateral investment and trade with Brazil. Petrobras's deepwater drilling technology could also help YPF explore untapped areas off Argentina with oil and gas-bearing potential.
Colombia
Reliant Energy, Houston, has sold its indirect interests in five Colombian natural gas companies as it refocuses its service business in the US and Europe.
Reliant said it sold interests in the companies, located in central and southwestern Colombia, to a Colombia-based investment trust. Developed as grassroots projects from concessions granted by Colombia in 1997, the distribution companies are located in the states of Valle del Cauca, Quindio, Risaralda, and Caldas. The fifth interest sold was in a pipeline-transportation company in the state of Tolima.
R. Steve Ledbetter, Relaint's chairman, president and CEO, said the company is refocusing its efforts on the US and western European markets to capture opportunities being created by electric restructuring in both areas.
Canadian buying spree
Seneca Resources Corp., a subsidiary of National Fuel Gas Co., has offered to acquire the outstanding shares of Tri Link Resources Ltd., a Calgary-based exploration and production company with 11,500 boe/d of production.
The purchase price is $7.05 (Can.)/ share, which Seneca last week said was 40% over the weighted average closing price of the shares over the previous last 20 trading days. Transaction value, including assumed debt, is $340 million (Can.).
Tri Link has agreed not to solicit or initiate negotiations with any other party and further agreed to pay a $6.3 million noncompletion fee to Seneca under certain circumstances. The offer is subject to the tendering of at least two thirds of the Tri Link common shares to Seneca and to regulatory approvals. Closing is expected by June 15.
The addition of Tri Link's production and undeveloped areas in Canada will build Seneca's total reserves base to nearly 1 tcfe, said Seneca.
In other merger action involving Calgary firms, Alberta Energy Co. (AEC) made a $37 million (Can.) cash offer for Westpoint Energy Inc. Westpoint properties in northeastern Alberta are about 98% natural gas with production of about 23.5 MMcfd. Directors have recommended acceptance of the offer, and about two-thirds of shareholders have agreed to tender their shares to AEC. Westpoint was formerly known as Slade Energy Inc.
And Samson Canada Ltd. has agreed to buy Calahoo Petroleum Ltd. for about $140 million (Can.), including debt assumption. The offer is contingent on Samson acquiring at least two-thirds of Calahoo shares. Samson Canada is a unit of Samson Investment Co., Tulsa
Louis Dreyfus
Louis Dreyfus Natural Gas Corp. has agreed to acquire the oil and gas assets of Costilla Energy Inc. for $100 million. The properties are in South Texas, the West Texas Permian basin, and Southeast New Mexico.
In September 1999, Costilla filed a Chapter 11 request for reorganization. The proposed acquisition will be subject to approval by the bankruptcy court and to other regulatory conditions. Closing is expected by the end of June.