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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 26, 2004: 11:03 AM 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.

A barrel of oil for June delivery was fetching more than $41 on the NYMEX Wednesday, near the highest price in the 21-year history of the contract. Light sweet crude has been above $41 a barrel for nearly two weeks.

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.

But the price is nothing to sneeze at and certainly makes selling oil a more profitable venture -- and could make some oil stocks a good buy.

"We believe the equilibrium price of crude oil has risen from about $20 per barrel during the 1990s to at least $30 during the current decade," Edward Yardeni, chief investment strategist at Prudential Financial, wrote in a note Wednesday morning. "The fundamentals are solid for the energy sector. Energy represents 6 percent of the S&P 500 market cap -- in our opinion it should be double-weighted."

The majors
Big oil companies have enjoyed a price boom
FirmP/E ratioForward P/E52-week price change
Exxon Mobil16.416.9+22%
BP16.214.9+31%
ChevronTexaco12.013.0+34%
ConocoPhillips10.210.9+39%
Source:Baseline

The usual suspects -- including Exxon Mobil (XOM: down $0.21 to $43.61, Research, Estimates), BP (BP: up $0.07 to $53.85, Research, Estimates), ChevronTexaco (CVX: down $0.13 to $91.54, Research, Estimates) and ConocoPhillips (COP: up $0.09 to $73.85, Research, Estimates) -- would seem to be the big winners, and their share prices have risen accordingly in the past year. Exxon Mobil's 19 percent rise makes it the laggard in the group.

"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 is part of the reason gas prices are through the roof -- as you might have noticed -- which means big oil companies are generally passing their higher costs on to the consumer.

Some service firms missing the boat

But 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
Schlumberger33.527.5+25%
Baker Hughes31.525.0+8.5%
Transocean124.837.1+16%
Halliburton29.321.3+25%
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).

"A lot of exploration and production firms are coming to realize that maybe $30-plus oil is for real, so growth will likely follow," said Prabhas Panigrahi, a managing director and oil analyst at Ehrenkrantz, King & Nussbaum, who expects exploration spending to jump some 15 percent this year.

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

What's more, some analysts suspect the current oil-price spike is driven in part by speculation and fears, rather than by rock-solid demand. And there are certainly reasons why oil could fall again soon, including a potential slowdown in China and declining U.S. demand for gasoline at the end of the summer.

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"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.

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.

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.

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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.

"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: down $0.51 to $42.03, Research, Estimates) are two names he likes.

-- This is an updated version of a story that first ran on May 14.  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 relationship with those companies.




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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.