Here Comes the Oil-Services Slump

Recs

12

Motley Fool Stock Advisor

Since 2002, David and Tom Gardner have returned 28.72% while the S&P 500 returned -11.25%. Try Stock Advisor free for 30 days.

Stock Advisor

In making my selection for Best Stock for 2009, I expressed extreme hesitancy in choosing from the energy sector. A roundup of recent data points and telling actions by various players should clarify why I'm still spooked.

In mid-December, G. Allen Brooks, an energy investment banker who pens the thoughtful Musings From the Oil Patch newsletter, projected a 1,000-rig drop in the U.S. rig count, as calculated weekly by Baker Hughes (NYSE: BHI). This figure peaked in September at a 23-year high of 2,449. A drop of 1,000 would thus translate to a decline of roughly 40%.

Today, I'm not really interested in exploring whether this collapse in activity is already priced into a stock like Nabors Industries (NYSE: NBR) or Precision Drilling Trust (NYSE: PDS). I'm more intrigued that public companies have quickly come around to Mr. Brooks' point of view.

NATCO Group, a wellhead separation equipment supplier, came out with guidance today that modeled an average rig count drop to 1,450 for 2009. In other words, a 1,000-rig drop from the peak.

Mr. Brooks is clearly well-followed, and for good reason. He turns up nuggets like this one: StatoilHydro (NYSE: STO) recently canceled a tender offer for drilling rigs in the North Sea, because rig rates are too high. Since this underreported announcement, I've also seen Leed Petroleum issue a similar statement. The small U.K.-based firm released its only rig, the Ensco (NYSE: ESV) 98, and it's waiting for rates to "normalize" before hiring any others.

These tidbits point to a growing disconnect, or what you might call a bid/ask spread, between E&Ps on the one hand, and drilling contractors like Transocean (NYSE: RIG) and Noble (NYSE: NE) on the other. For a time, it seemed as though the deepwater-levered players would largely be immune to such pushback. But with crude oil down to the low $40s, even the most sought-after rigs may see their going rates ratcheted down before long.

Further Foolishness in the pipeline:

Follow along with the Global Gains team as they travel to key business centers in China to uncover the very best investing opportunities! Sign up here to receive their FREE dispatches from the road.

Precision Drilling is a Global Gains pick. StatoilHydro is an Income Investor selection. See if either service serves your portfolio purposes with a free 30-day trial.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2009, at 10:59 PM, PebbledShore wrote:

    "But with crude oil down to the low $40s, even the most sought-after rigs may see their going rates ratcheted down before long."

    Yes, but the question is, has not the market already significantly discounted stocks like NE and RIG for lower, even dramatically lower dayrates? The answer is "yes," and now the quesiton becomes, has the market overshot to the downside?

Add your comment.

Compare Brokers

TD AMERITRADE
more info
ShareBuilder
more info
Power E*Trade

more info
Scottrade
more info
Fool Disclosure

DocumentId: 805583, ~/articles/ArticleHandler.aspx, 7/13/2009 10:08:10 PM

Keep Reading:

“Here Comes the Oil-Services Slump”

We will use your email address only to keep you informed about updates to our web site and about other products and services that we think might interest you. The Motley Fool respects your privacy. Please read our Privacy Statement

.

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

What Fools Are Saying

Get involved! »
Jul 13 at 4:01 PM

Market Summary

DJIA 8,331.68 +185.16 +2.27%
S&P 500 901.05 +21.92 +2.49%
NASD 1,793.21 +37.18 +2.12%
Sponsored by:

Related Tickers

Baker Hughes, Inc.

CAPS Rating 5/5 Stars

$35.17

+0.64 (+1.85%)

Outperform1060

Underperform37

Rate This Stock