If Internet stocks have jangled your nerves, maybe it's time to take a look at an old-fashioned industry.
Oil services stocks, for instance, have hit a gusher. The Philadelphia Stock Exchange's oil service sector index (OSX)--which comprises weighted common stocks of 15 oil services companies--is up 28.24 percent from the beginning of the year, compared with 10.4 percent for the Standard & Poor's 500 index.
Analysts believe there's room for an additional 30 percent to 40 percent gain in the index. "Our view is that oil services names provide a more attractive vehicle of investment," said Geoff B. Kieburtz, oil services analyst at Salomon Smith Barney Inc.
There's no mystery to this rise. Oil services stocks are tied to the price of oil, which has been rising. Barely at $12 a barrel until March, the price of crude oil reached $20.63 on Friday. That in turn means a lot of business for oil services companies, whose once-idle rigs and submersibles will be humming busily once again.
The stocks of some of the sector's big names, including Schlumberger Ltd., Halliburton Co., Baker Hughes Inc., Diamond Offshore Drilling Inc. and Weatherford International Inc., have appreciated significantly since January. As of the market close Friday, Halliburton was up to $44.06 1/4 from its January low of $29.06 1/4; Diamond to $30.12 1/2 from $22.68 3/4; Schlumberger to $60.87 1/2 from $46.43 3/4; and Weatherford to $38.31 1/4 from $17.43 3/4.
Others have been gaining ground, too, since March. Global Marine Inc. has more than doubled, to $16.31 1/4, from a March low of $7.68 3/4, Santa Fe International Corp. is at $20.68 3/4 vs. its March low of $12.93 3/4 and McDermott International Inc. has gained $7.12 1/2 since its March low to close Friday at $26.87 1/2.
In March, the Organization of the Petroleum Exporting Countries (OPEC) agreed to production cutbacks and the Asian economies started to stir out of their coma, pushing demand for oil back up. As a result, oil inventories are expected to fall below their average for the previous five years before 1999 ends.
"A lot of oil services stocks are higher than their year-beginning levels but still well below the 1997 highs," said Norman Rosenberg, senior investment officer for energy at Standard & Poor's Equity Group.
Although 1999 spending on exploration and production is set to shrink 33 percent from 1998, analysts expect it to rise 10 percent in both 2000 and 2001. "What we are going to see is a return to healthy E&P spending," Kieburtz said.
The companies in the OSX have a cumulative market cap of about $88 billion, although those outside the index such as Diamond, Santa Fe and McDermott International have substantial market values (more than $8 billion total for the three).
Once E&P spending is uncapped, drillers and drilling-related service providers will gain first. Seismic companies also might gain.
The OSX has a variety of companies. Schlumberger offers a comprehensive range of services; Halliburton is a diversified company with interests in engineering and construction; Baker Hughes is into oil-field products and services; Global Marine is an offshore driller; and Global Industries Ltd. provides firefighting, deep-water pipeline installation and maintenance services.
Analysts are bullish about almost all the companies in the OSX and several outside it. The bitter months of the past year have made companies focus on becoming more efficient, so analysts said that even if oil prices slip, earnings will be relatively protected.
James H. Stone, managing director at Schroder Securities Ltd., likes drillers Weatherford International and Nabors Industries Inc., besides Baker Hughes and a few small-cap stocks. Rosenberg of S&P Equity Group recommends Baker Hughes, Global Marine, Santa Fe, Transocean Offshore Inc. and R&B Falcon Corp to aggressive investors.
"We feel very strongly that stocks will appreciate significantly over the next six to 12 months," Stone said.
That doesn't mean earnings will follow suit in the third and fourth quarters. But the recent round of price increases looks set to hold. "Oil prices should stay north of $20 a barrel in the second half of this year and around $19 a barrel in 2000," Stone said.
Tracking Oil Stocks
Here are performance figures for some oil services stocks:
Market Earnings per share
capitalization, Second Second
in billions, quarter quarter
as of July 23 1999 1998
Baker Hughes $11.0 5* cents 36 cents
Halliburton 19.4 19 55
Schlumberger 33.3 23 69
BJ Services** 2.0 5* 41
Cooper Cameron 1.9 17 81
Smith Int'l. 2.1 -- 6 16
Weatherford Int'l. 3.7 -- 2 65
Diamond Offshore 4.1 37 76
Ensco Int'l. 2.0 -- 7 57
Global Marine 2.8 16 42
Noble Drilling 2.9 21 38
Rowan Cos. 1.5 -- 3 5
Santa Fe Int'l. 2.4 37 56
*Estimates by Merrill Lynch
**Earnings are for first half of 1999
SOURCE: Merrill Lynch