Banc of America analyst sees US oil service fundamentals improving

By OGJ editors

HOUSTON, Mar. 18 -- The US rig count bottomed earlier in the year and has risen more seasonally than any time in the last 20 years, said Banc of America Securities analyst James K. Wicklund.

"Commodity prices appear strong enough for the rise to continue," he noted. Baker Hughes Inc. reported Mar.14 that the US had 927 rotary rigs working (OGJ Online, Mar. 14, 2003). That was up 82 rigs, or 10%, from the Jan. 17 tally of 845 rigs working in the US (OGJ Online, Jan. 17, 2003). Jan. 17 was the seasonal bottom of the rig count this cycle, Wicklund said.

"It is too early to say how high the high count will go or how long the current drilling recovery will last. But generally, cyclical drilling recoveries have lasted about 2 years," he said.

Natural gas
Natural gas prices are expected to stay well above oil companies' reinvestment threshold for the next few years and will drive drilling activity in the US, Wicklund said. A 40% increase in drilling activity is needed to forestall the drop in US gas production, and that would take 2 years, he said.

Independent operators, who account for more than 65% of US natural gas drilling, say they need at least $3.30/Mcf in order to spend money on drilling activities.

"Currently, the natural gas futures strip shows prices staying above $4/Mcf until May 2005 and not going below $3.75 through 2008, though the liquidity of the futures market is not very representative that far out," Wicklund said.

Companies that do most of the drilling for natural gas in the US finance their drilling by using variable cash flow budgets rather than established capital budgets like the major and national oil companies, he noted.

"There is a great deal of concern over how high the oil field service stocks can go and how long a recovery can last. . . . We expect 2003 US rig activity to be up from 2002," Wicklund said. He also expects that 2004 US rig activity will be up from 2003 levels.

Sector stock prices
Wicklund urged investors to buy oil service sector stocks, advocating, "strategically buying on any near-term weakness."

"As oil prices rise, either in anticipation of war or in the event of war, stock prices are likely to rise, though not rise as high as many expect. Conversely, when stocks drop at the 'end' of any conflict, they are not likely to drop as much as expected," Wicklund wrote in a Mar. 17 research note.