By OGJ editors
HOUSTON, July 10 -- Service companies' second quarter earnings per share will be less than first quarter earnings because the North American rig count decline continued into April, predicts RBC Capital Markets, a unit of RBC Dain Rauscher Inc.
"Overall, we expect (earnings per share) to trough in the (second quarter) for most companies in our coverage universe with significant (second half) improvement coming from North American natural gas focused companies," said Kurt Hallead, an RBC analyst in Austin.
Banc of America Securities analyst James Wicklund of Houston expects service companies' second quarter earnings conference calls will encourage investors. Companies leveraged to increased North American natural gas drilling particularly will benefit, he said.
Second quarter trends
For companies with large market capitalization, Hallead expects second-quarter earnings to be down an average of 14% from the first quarter and 43% year-over-year. For midcap companies, he expects earnings to be down an average of 16% and 43%, respectively. For equipment companies, he expects earnings to be down an average of 5% sequentially and 19% year-over-year.
"Overall, this is the best performing subsector through the trough from an earnings standpoint, as healthy backlogs and surprisingly strong new order flow have provided a consistent base of business," Hallead said of equipment companies.
Most service companies apparently expect a short downturn because they have continued spending on equipment to upgrade their fleets. "In addition to stronger-than-anticipated capital equipment orders, demand should pick up for spare-aftermarket parts once drilling activity resumes," Hallead said.
"The strongest tone (during upcoming conference calls) will most likely come from North American land and offshore drilling companies. US land drillers have experienced greater asset utilization, and pricing should start improving in (the third quarter). Gulf of Mexico jack up drilling contracts continue to have pricing power," he said.
Service company sector stock prices
But despite optimism within the industry, service company stock prices probably will remain in a trading band of 90-105 on the Philadelphia Oil Service Index (OSX), he said. At midday Tuesday, the OSX was 90.33, up 0.85%. RBC Capital Markets' 12-month price target for the OSX is 130, Hallead said.
For the second half outlook, he believes service company stock performance will be a function of "macroeconomic trends, weekly inventory trends, and the Organization of Petroleum Exporting Countries' oil production decisions. Uncertainties regarding oil prices and natural gas inventories will continue to provide a wall of worry for the oil service group into the October-November time frame."
Seasonal pattern continues
Wicklund believes the oil service group will see a stock price rally starting this month and extending into September.
"While we believe the recent pullback in the OSX is justified by the (gas storage) inventory levels, we continue to expect the seasonal rally," Wicklund said. "We expect the oil field service stocks to resume their rally beginning in mid-July fueled by a round of bullish conference calls and upward estimate revisions for (second half 2002) and 2003 in addition to an improving economy."
The rig count hit bottom this year in April, and natural gas prices have averaged well above $3/MMbtu since then, prompting oil and gas producers to increase their drilling budgets, he said.
"All of this fits in nicely with our seasonal timing model that calls for a (service company stock price) rally into September," Wicklund said.
