Analysts say the outlook is strong for oil services industry

By the OGJ Online Staff

HOUSTON, Mar. 26�Oil service companies are watching both their stock prices and their earnings margins grow, analysts said, adding the service sector is being driven by increased oil and gas drilling activity worldwide.

Investors appear to agree, as the benchmark Oil Service Index rose 1.64% to 124.24 Monday.

Meanwhile, Robert Morris, Salomon Smith Barney Inc. analyst in New York, issued a report earlier Monday noting the stock of exploration and production companies dropped last week after the Federal Reserve lowered interest rates.

"E&P shares declined by 2.6% on average last week while West Texas Intermediate spot crude oil and composite spot natural gas prices rose 0.9% and 1.2%, respectively. Concurrently, the S&P 500 declined 2.9% while the Nasdaq composite was up only slightly," Morris said in a research note.

But overall, Morris said he expects to see gains for E&P stock this year based upon what he sees as relatively firm gas prices and near-term support for crude prices.

Oil services analyst Kurt Hallead, with Merrill Lynch, Pierce, Fenner & Smith Inc., said the fundamentals of the oil service business are improving, particularly for land drillers and offshore jack up drillers.

"According to our estimates, oil service earnings per share growth should range between 50-200% in 2001 and 30-100% in 2002," Hallead said in a research note.

Carol Lau, Banc of America Securities LLC services analyst in New York, said earlier this month she expects oil company upstream budgets will rise by at least 20% this year, driving up rig utilization rates and dayrates worldwide.

Noble Drilling Corp., Sugar Land, Tex., recently secured letters of intent for 1-year contracts on two idle jackup rigs and a 1-year contract extension on another. All three contracts involve the Middle East, demonstrating international drilling budgets are improving, Lau said.

"Second, the rates on these contracts were in the mid-$50,000s, up from market rates in low-to-mid $40,000 one month ago," Lau said in a research note, adding Gulf of Mexico day rates also are improving.