Oil driller Transocean, Inc. (NYSE: RIG), whose shares have probed, but have been unable to move and stay permanently above $160 -- may have received the catalyst it needs to reach loftier price levels.
Transocean's shares jumped $8.34, ending at $155.54 after Bloomberg News reported that Petroleo Brasileiro (NYSE: PBR), Brasil's state-controlled oil company, leased about 80% percent of the world's deepest-drilling offshore rigs to explore prospects. That included the Western Hemisphere's biggest discovery in decades, the Tupi field. Further, the activity of Petroleo, also known as Petrobras, is forcing up day-rates for oil rigs. PBR also closed higher Thursday, up $2.00 to $68.27.
Further, Petrobras is in talks with Transocean to extend leases as much as three years ahead of expiration, Robert Long, chief executive officer for the Houston-based RIG, told Bloomberg News. Also, Petrobras plans to start pumping oil from Tupi in Q1 2009. Tupi is the largest oil find in North America since the 1976 Cantarelli field discovery in the Gulf of Mexico.
Global oil demand, despite oil being more than $100 per barrel, remains solid. Further, there are increasing signs that the aforementioned international demand is likely to keep oil's price at lofty levels, even with a U.S. recession. That's bad news if you buy gasoline or oil, but good news if you own shares of Transocean.
Transocean (NYSE: RIG) offers deepwater drilling services in the world's major offshore oil-producing regions, including Africa, Asia, Brazil, Canada, India, Middle East, Gulf of Mexico, and the North Sea.
In general, analysts see RIG generating an 18%-25% total return on equity for 2008-2009, with an upside possible, given the company's strong position in deepwater drilling, which offers a higher return potential than shallow water drilling. And currently, it looks like a 2008 revenue upside is in sight for Transocean,
Further, given a capacity shortage sector-wide for deepwater rigs, dayrates have increased substantially, and look for RIG's pricing power to continue into 2009 (RIG's dayrate for 2009 is now $600,000 for high-spec, ultra-deepwater rigs). Prospects for Transocean's jackup rig market are not as bright, with a possible oversupply in early 2009. The Reuters F2008/F2009 EPS consensus estimates for are $14.15/$16.82.
Readers of this space know that oil/oil services has been a preferred sector. Given ramping demand in the developing world and oil's importance in a growing global economy, oil and oil services companies are likely to continue to experience steady demand for their services/products, and a provider worth a review is Marathon Oil.
Marathon Oil Corporation (NYSE: MRO) has what analysts like to see in an oil operation: a large/geographically-wide exploration footprint, very good production, and strong refining operations.
Further, that last tangible may be the most valuable, given the barely-adequate refinery capacity in the United States. What's more, the stock market's early 2008 sell-off has created a buying opportunity with Marathon. With a p/e of about 9, MRO's risk/return ratio is low. The Reuters FY 2008/FY 2009 EPS consensus estimates for MRO are $6.33 to $6.77.
In an era of elevated energy prices, one argument noted in this space before is that oil and oil/natural gas service companies are likely to remain promising plays for the foreseeable future, barring the discovery of a cheap, widely-available, alternative energy. With this in mind, Core Laboratories is worth a review.
Core Labs (NYSE: CLB) analyzes petroleum reservoir rock and fluids, helping oil companies determine how much oil or gas exists in their reservoirs and how quickly it can be extracted.
Analysts see +20% revenue growth for CLB in 2008 on strong oil/gas well analysis revenue. Analysts also like CLB's ramping hydraulic fracturing / field flooding and reservoir management services. The Reuters F2007/F2008 EPS consensus estimates for CLB are $4.86/$6.07
Further, with global oil/gas exploration activity expected to increase 20-35% in 2008 after +20% increases in 2007 and 2006, analysts believe Core will be able to continue to increase its business at healthy rates. (Oil exploration budgets are likely to decline only if oil prices remain below $50 per barrel for a sustained period.)
The secular growth trends in oil and gas services and infrastructure continue, and a company well-positioned in these two promising sectors, and by extension, worth a review, is Jacobs Engineering Group.
Jacobs Engineering Group (NYSE: JEC) is a diversified engineering/professional technical services company providing services to the chemical, petroleum, pharmaceutical and biotech sectors. The company also has aerospace and defense contracts with the U.S. government.
Analysts expect 14-20% revenue growth for F2008 on strong upstream oil/gas and downstream petroleum refining work. Public transportation infrastructure work also remains solid.
Analysts also like JEC's growth opportunities for chemical projects in the Middle East and Europe. Further, overall margins are expected to improve. The Reuters F2008/F2009 EPS consensus estimates for JEC are: $2.99/$3.59.
When one can combine systems technology and oil services, that company is worth an evaluation, and FMC Technologies fits the bill.
FMC Technologies (NYSE: FTI) designs and manufactures services, technology systems and products for energy systems, food operations, and airport systems.
Analysts really like FTI's energy systems business, which helps companies control the flow of oil/gas producing wells, among other tasks. As of September 2007, FTI had an energy systems order backlog of $3.3 billion, up more than 65% from a year earlier.
The risks? Analysts are keeping an eye on subsea drilling activity. Also, a sustained, substantial drop in oil's price will no doubt affect oil/natural gas companies' service budgets, and FTI's operations.
The First Call mean rating for FTI is: Hold. [22 firms.] Mean 2008 target: $64.00. [high: $80, low: $47.]
Stock Analysis: FMC Technologies is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from FTI's shares. Sell / Stop Loss if you were to purchase shares in this company: $36.
DISCLOSURE: Joseph Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.
Readers of this space know that the preferred sectors include oil services and infrastructure stocks, and when one can combine the two, it's like a double header at Yankee Stadium (or two chamber concerts at Lincoln Center). Foster Wheeler fits the aforementioned bill.
Foster Wheeler (NASDAQ: FWLT) provides design, engineering, procurement, construction, and project management services for oil/natural gas processing facilities. The company also designs and builds steam generating and auxiliary equipment for electric power generating stations and industrial markets around the world.
Analysts expect 2007 revenue to increase a remarkable 35%-40%, with a 20%-25% gain seen for 2008 on continued, strong Asia-Pacific and Middle East capital spending. Further, increasing demand for FWLT's preferred power generation system adds to the mix. The Reuters F2007/F2008 EPS consensus estimates FWLT for are $5.92/$7.00.
The risks: A slowdown in Europe (more than 50% of revenue) or emerging market demand with hurt FWLT's results. Analysts also have their eye on the appearance of possible supply/labor shortages down the road.
The First Call mean rating for FLWT is: Buy. [5 firms.] Mean 2008 target: $176.00. [high: $190, low: $150.]
Stock Analysis: Foster Wheeler is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from FWLT's shares. Sell / Stop Loss if you to purchase shares in this company: $95.
DISCLOSURE: Joseph Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.
Despite the oil market's recent correction / minor pullback, oil remains at an elevated price, and the outlook for the oil and oil services sector remains solid.
And one oil service company worth an evaluation is Diamond Offshore (NYSE: DO).
Diamond is a contract driller of offshore oil and gas wells, with a concentration in deepwater drilling. The company has a strong fleet of floater rigs: dayrates for these rigs will continue to increase at double-digit rates, a market condition that reflects their increased value stemming from higher energy prices, and some pricing power for DO.
Further, Diamond has an impressive geographical footprint (rigs operating in the Gulf of Mexico, North Sea, South America, Africa, Australia, and Southeast Asia) and superior client diversification (51 customers). The Reuters F2007/F2008 EPS consensus estimates for DO are $6.75/$11.89.
It goes without saying that every defensive stock category is being tested in this market.
Moreover, while no sector is 100% bullet-proof from a market that seems to look for an excuse to decline another 200 points, the oil and oil services sector has fared reasonably well, and in this category Oceaneering International (NYSE: OII) is worth a review.
Oceaneering is an advanced technology company servicing the oil and gas industry, among others. It focuses on providing underwater drilling support, construction, inspection and repair services to oil/gas companies.
As one might estimate, OII's fortunes are tied to the strength of oil/natural gas prices and with prices at near-record levels, OII's business is strong and likely to remain so: most analysts see a long, strong, global deepwater oil services cycle.
It doesn't take a geologist or an oil sector engineer to figure out that oil / energy-based companies are in demand in this era of elevated energy prices. And when these companies need parts for maintenance, that's where National Oilwell Varco (NYSE: NOV) comes in.
National Oilwell designs, manufactures and markets components and systems used in oil and gas drilling/production. Here's a telling statistic regarding NOV's involvement: more than 90% of mobile offshore rigs and a majority of land rig use components manufactured by NOV. Those are Microsoft (NASDAQ: MSFT)-type usage numbers.
In general, analysts see continued, strong EPS growth for NOV: the growth in offshore rig newbuild orders may decelerate in 2008, but overall orders should nevertheless remain strong in 2008. The Reuters F2007/F2008 EPS consensus estimates for NOV are $3.72/$4.53.
Another positive: It's important to note that slowing newbuild orders will not spell the end of NOV's solid returns on equity. The reason? The world's stock of rigs is deteriorating, with the average rig exceeding its designed life expectancy. In other words, there are lots of older rigs in use, replacing or upgrading these rigs will generate substantial work for NOV, and these tasks are destined to remain high-margin activities.
The First Call mean rating for NOV is: Buy. [19 firms.] Mean 2008 target: $81.30. [high: $90, low: $63.] Stock Analysis: National Oilwell is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than one year should be rewarded from NOV's shares. Sell / Stop Loss if you were to purchase shares in this company: $49.
In the 1989 motion picture "Dead Poets Society," actor Robin Williams, playing school teacher John Keating, inspires his new students to take advantage of opportunities presented in life, to "seize the day." Well, if Robin Williams will allow, now is the time to "seize the day with Schlumberger." (Pronounced: shlum-bur-ZJAY.)
Oilfield services company Schlumberger Ltd. (NYSE: SLB) is likely to benefit from growing demand for oilfield services technology, particularly in the high technology-dependent Middle East, Africa, and Eastern Europe regions.
Further, although North American margins have narrowed somewhat so far in 2007, international margins widened. Overall, in 2008 analysts see SLB's margins totaling 30% -- still a very healthy figure -- with revenue growth of 12-14%.
It's a reality of the era of elevated energy prices that the oil/natural gas services sector is likely to remain strong for the foreseeable future, baring the discovery of a cheap, widely-available alternative energy. And among oil/natural gas services companies, Transocean (NYSE: RIG) is a standout.
Transocean offers deepwater drilling services in the world's major offshore oil-producing regions, including Africa, Asia, Brazil, Canada, India, Middle East, Gulf of Mexico, and the North Sea.
In general, analysts see RIG generating a 18%-25% total return on equity for 2007-2009, with an upside possible, given the company's strong position in deepwater drilling, which offers a higher return potential than shallow water drilling. And currently, it looks like a 2008 upside is in sight for Transocean: of the company's 82 offshore rigs, only seven have not been committed for 2008. Further, given a capacity shortage sector-wide, dayrates have increase substantially, and look for RIG's pricing power to continue past 2009. (RIG's dayrate for 2006 increased 35% to $142,000 and its rig utilization rate improved 5% in 2006.) The Reuters F2007/F2008 EPS consensus estimates for RIG are $8.01/$11.32.
The risks? RIG's dayrate increases could slow if major oil companies begin to reduce exploration budgets. A U.S. recession could also substantially decease home building, which could lower the demand for oil.
The First Call mean rating for RIG is: Buy. [34 firms.] Mean 2007 target: $131.00. [high: $168, low: $89.] Transocean's share were down $2.04 to $127.60 in Wednesday afternoon trading, but view that dip as a buying opportunity, as it's reasonable to assume that the industrialized nations will need oil services companies for a few years, to say the least.
Stock Analysis: Transocean is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 1 year should be rewarded from RIG's shares. Sell / Stop Loss: $84.
"The energy sector has been the U.S. stock market's best performer over the past three and five years -- and among the best so far in 2007," says Richard Moroney in his Upside newsletter.
He says, "Shares of energy companies, especially equipment and services concerns, seem unduly cheap -- even if per-barrel oil prices retreat by $10 or $15." Here he looks at Gardner Denver Inc. (NYSE: GDI) and NATCO Group Inc. (NYSE: NTG).
"Over the last three years, spending on capital expenditures has grown at an impressive 28% annual clip. Even if oil and gas prices drop sharply, which seems unlikely given supply and demand forecasts -- capital spending should remain robust.
"Gardner Denver is one of the largest providers of reciprocating pumps used in oil and gas drilling and production. For full-year 2007, management lifted its per-share profit guidance to a range of $3.10 to $3.18, up from the $2.49 earned in 2006. Gardner Denver, positioned to exceed consensus profit estimates, is a Best Buy.
"In any industry, one of the most sure-footed means of keeping profits steady is to own the suppliers of production means -- the old 'invest in the picks and shovels' approach," explains Neil George in Personal Finance.
He says, "For refiners, it means pipe, compressors, and the other bits used to crack crude into further profitable products." Here, he looks at a trio of favorites: Dresser-Rand Group Inc. (NYSE: DRC), Shaw Group Inc. (NYSE: SGR), and Tenaris (NYSE: TS).
"Dresser Rand is a leading global producer of highly specialized compressors and turbines, nearly 95% of which are used in the energy business. Compressors are used extensively in refineries; they're a crucial part of equipment used to process heavy and sour crude oils. The reactions used to process these more-complex crudes require generating extreme pressure and temperature.
"Dresser's products are also used to process Canadian oil sands. Dresser is also involved in some high-tech deepwater equipment work. The company has designed a subsea compressor and separator for Norway's Statoil.
"This equipment literally sits on the seafloor; the compressor helps to separate gas from oil and transport these commodities by subsea pipeline to distant floating production platforms.
The secular growth trends in oil and gas services and infrastructure continue, and a company well-positioned in these two promising sectors, and by extension, worth a review, is Jacobs Engineering Group.
In the 1989 motion picture 
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
Oil hits record $127.43 on supply concerns, raised Goldman forecast
