Oil Services Better Insulated Than Most Energy Sub-Sectors (RIG, DVR, PDS, WFT, NOV, BJS, BHI, BAS, HAL, SLB, SII)

Oil Services are deemed by many market pundits as being more insulated than integrated oils, refiners, and other sub-sectors of the energy sector for oil and gas.  While these frequently move in-line with oil prices and with the sector, they are expected to have much more stable earnings than counterparts elsewhere in the sector.  Many of the oilfield services shares are down nearly 20% or more along with a major drop in oil prices. Transocean’s shares are holding at less than 1% down from 52-week highs, probably on the strength of the company’s bookings.

Transocean Inc. (NYSE: RIG) has given back nearly one-quarter of its value from its highs.  The worst performer among the larger players was CalDive (NYSE:DVR), down 43% from its 52-week high. Precision Drilling Trust (NYSE:PDS) is down about 30%, Weatherford (NYSE:WFT) is off about 27%, and National Oilwell Varco (NYSE:NOV) and BJ Services (NYSE:BJS) are down about 25%. A host of others are off around 20%: Baker Hughes (NYSE:BHI) at 22%; Basic Services (NYSE:BAS) at 21%; Halliburton (NYSE:HAL) at 20%; and Schlumberger (NYSE:SLB) and Smith International (NYSE:SII) are off about 19%.

That 20% number is pretty well reflected in the stock price declines among the majorintegrated oil companies. One might conclude that big oil sets the pacefor the services companies. But is that really the case?  Ken Heebner’s CGM FOCUS FUND has also stuck with the service companies.

Transocean’s forward P/E ratio is 7.81, against its current P/E of8.25. The company’s 5-year PEG ratio is 0.42. CalDive, the worstperformer, has a forward P/E of 7.46, compared with its current P/E of12.16, and a 5-year PEG ratio of 0.31. The largest companies in thesector, Schlumberger and Halliburton, have 5-year PEG ratios of rightaround 1. The smaller companies are expected to grow more than thelarger ones.

One interpretation of this is that it’s easier for smaller companies togrow than it is for large companies. Schlumberger, with a market cap ofabout $110 billion, needs large projects to make an impact on itsperformance. CalDive can get by with smaller projects. Is there anotherNorth Sea discovery on the horizon? Or an Alaska North Slope? With theexception of the large discoveries offshore Brazil, the answer is "No."Smaller projects, such as recompletions and workovers onshore in theUS, look to be where the action is for production companies. There andin the Gulf of Mexico, where Transocean is the sector’s largest player.Overall, the outlook for oilfield services is strong if the industrycan control costs and investors can be patient.

Right now drilling and day rate prices are very high whether or not oil trades back near $150 as Goldman Sachs reiterated today or if prices go back under$100.00.  You can also see how the services sector performed much better than the pipeline sector.  You can also see how the refiners have fared out the worst of the sector.

Paul Ausick
August 20, 2008