CNN/Money  
Markets & Stocks
graphic
Rising oil doesn't lift all boats
Record oil prices are good news for big producers, but service firms still wait for some love.
May 14, 2004: 12:36 PM EDT
By Mark Gongloff, CNN/Money senior writer

NEW YORK (CNN/Money) - Oil prices are gushing, so that must mean oil stocks are gushing, too. Yes, but not all are doing it with the same force.

 QUICK VOTE  
What was the top business news story of the past week?
  Oil hits record high
  Producer price rise doubles forecasts
  Disney posts strong quarter, bolstering Eisner
  MCI cuts 7,500 jobs

   View results

A barrel of oil for June delivery was fetching more than $41 on the NYMEX Friday, the highest price in the 21-year history of the contract.

Adjusted for inflation, of course, $41 is nowhere near as high as the price in, say, 1980, when oil cost nearly $80 a barrel, in 2002 dollars.

Still, the price is nothing to sneeze at and certainly makes selling oil a more profitable venture.

Your usual suspects -- the so-called "super majors," including Exxon Mobil (XOM: up $0.57 to $43.30, Research, Estimates), BP (BP: up $0.51 to $52.91, Research, Estimates), ChevronTexaco (CVX: up $1.13 to $93.00, Research, Estimates) and ConocoPhillips (COP: up $0.80 to $72.75, Research, Estimates) -- would seem to be the big winners, and their share prices have risen accordingly in the past year. Exxon Mobil's 21 percent rise makes it the laggard in the group.

The majors
Big oil companies have enjoyed a price boom
FirmP/E ratioForward P/E52-week price change
Exxon Mobil15.916.8+21%
BP15.814.8+29%
ChevronTexaco12.113.5+37%
ConocoPhillips10.011.1+38%
Source:Baseline

"They're primarily in the business of pulling oil out of the ground, so it's generally a benefit to them," said Jeb Armstrong, analyst at Argus Research, an independent research firm.

"If there's any drawback, it would be in terms of how higher prices would affect the margins in their refining operations -- but that's not an issue now because of capacity constraints we have here in the United States."

Tight refining capacity means there's less gasoline available, which means gas prices are through the roof -- as you might have noticed -- which means the super majors are generally passing their higher costs on to the consumer.

Some service firms missing the boat

Unfortunately for some companies, however, while the big firms have been generous in spreading the pain, they haven't been as generous in spreading the love.

Service firms
Price gains haven't yet trickled all the way down
FirmP/E ratioForward P/E52-week price change
Schlumberger32.626.8+22%
Baker Hughes31.324.9+15%
Transocean118.0NA+17%
Halliburton29.021.1+20%
Source:Baseline

Eventually, higher prices will lead to more oil being sucked out of the ground, which means more work for oil field services companies such as Halliburton (HAL: Research, Estimates), Schlumberger (SLB: Research, Estimates), Baker Hughes (BHI: Research, Estimates) and Transocean (RIG: Research, Estimates).

But, after getting burned by a short-lived oil surge in the early 1980s, the majors are very, very slow to change plans, and the recent oil-price boom hasn't sent them scrambling to the drawing board to create more work for the service companies.

"There would have to be a structural shift in prices to change their perspective," said Armstrong. "Right now, there's a lot of speculation built into oil prices -- the majors will have to see that turn into fundamentals in order to change their plans."

There are many reasons why oil prices could fall again soon:

  • China's blistering-hot economy, which has fueled much of the global demand for oil, will slow down, if the Chinese government has its way.
  • U.S. demand for gasoline will fade as the summer ends.
  • OPEC, the cartel controlling much of the world's oil supply, has been over-producing -- contrary to its threat earlier this year to cut production -- and may start to produce even more, if Saudi Arabia gets its way.

"With the U.S. gas market overheated and with the potential deceleration in China's economy, we tend to think that a neutral-to-bearish outlook on the services sector is still warranted," said Wes Maat, an analyst with Fulcrum Global Partners.

Related stories
graphic
Oil hits record
Gas prices hitting SUV sales?
New record for gas prices
Riding the oil slick
Money: no oil crisis, yet
Gas prices to hit $2.03

In March, Maat told CNN/Money he expected a correction in some service companies' shares, and he was right. The Philadelphia Stock Exchange's Oil Service index (OSX: Research, Estimates) has fallen 11 percent since peaking in early March, and Maat thinks it could have further to fall.

Exploration firms, such as Anadarko (APC: up $1.67 to $55.40, Research, Estimates) and Burlington Resources (BR: up $2.28 to $67.43, Research, Estimates), have not yet suffered from such a correction, but price declines could hurt them, too.

"I don't know that investors are willing yet to embrace the notion that $35 or $40 oil is something that's sustainable," said Frank Bracken, analyst with Jefferies & Co.

But Bracken believes there may still be some well-priced, well-positioned firms out there; one he likes is Canadian firm Talisman Energy (TLM: up $0.60 to $59.34, Research, Estimates).

Future looks brighter

Still, analysts believe many of these firms should be fine in the long term and that the penny-pinching of the majors just means there will be more projects and more work for the service companies in the future.

YOUR E-MAIL ALERTS
ChevronTexaco Corporation
Exxon Mobil Corporation
Oil and Gas

There are also plenty of reasons why prices could stay relatively high for quite a while. Worries about violence in the Middle East aren't likely to dissipate any time soon. Even if China slows down, it seems unlikely to collapse entirely, and the U.S. economy is expected to stay strong throughout the year. With all this in mind, the U.S. government estimated this week that oil could average $36 a barrel this year.

That could encourage the majors to undertake big, expensive well-drilling projects, good news for the bigger service companies.

"The stable environment will benefit Baker Hughes, Schlumberger and those levered to higher-margin, more capital-intensive projects," said Pierre Conner, analyst at Hibernia Southcoast Capital.

Conner said companies that specialize in faster work, such as BJ Services (BJS: Research, Estimates), may already have gotten as much of a ride out of higher prices as they're going to get -- the bigger names could take over from here.

And Armstrong of Argus Research said companies who specialize in using advanced technology to pull more oil out of old wells should be long-term winners, as well. Schlumberger and Weatherford International (WFT: up $0.76 to $41.67, Research, Estimates) are two names he likes.  Top of page


Aside from Wes Maat, who owns some Transocean shares, none of the analysts quote owns shares of the companies discussed. None of their firms have any banking relationship with those companies.




  More on MARKETS
Why it's time for investors to go on defense
Premarket: 7 things to know before the bell
Barnes & Noble stock soars 20% as it explores a sale
  TODAY'S TOP STORIES
7 things to know before the bell
SoftBank and Toyota want driverless cars to change the world
Aston Martin falls 5% in its London IPO




graphic graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.