Small cap oil services companies are reporting cautious optimism regarding the length and duration of the energy cycle, echoing similar comments expressed by their large cap brethren.
$65 Oil Still Works for Smith
During the recent of Smith International (NYSE:SII) Q3 conference call, CEO Doug Rock said the company expects the North American rig count to shrink in 2009, but cited three reasons why investor concern over the depth of the cyclical downturn in energy was "overblown".
- Oil at $60 a barrel is six times the price at the bottom of the 1998 downturn, and provides a strong rate of return for oil and gas exploration companies to continue spending.
- Supply and demand for both oil and gas are in tight balance and no large capacity overhang exists.
- Depletion rates are much higher during this cycle at 7% due to better removal technology.
Rock hinted that the company would have earnings growth in 2009. "I would be disappointed if our 2009 earnings didn't exceed our 2008 results", Rock said. (To learn more, read Conference Call Basics.)
More Optimism From the Small Caps
Joseph Winkler III, the chairman and CEO of Complete Production Services (NYSE:CPX), said in the recent Q3 earnings call that he expected activity to decline in the fourth quarter and 2009, but he also expected that any significant drop in activity would be short-lived and could result in a strong recovery. He said the company's position in unconventional resource plays would be less susceptible to significant declines in activity levels.
Tidewater (NYSE:TDW) owns and operates a fleet of offshore supply boats that provide supplies to offshore oil and gas facilities. During Tidewater's fiscal 2009 Q2 conference call, Dean Taylor, president and CEO, said his business would be partially protected by hurricane-related repair work in the Gulf of Mexico. He also made the case that many of his peers have made: that international work will not hurt immediately or for as long as domestic activity. Taylor also said that the world's supply of oil and gas suffers from a "shrinking surplus production capacity and increased service intensity" which would correct the cycle quickly.
Gulf Island Fabrication (NYSE:GIFI) manufactures capital equipment used in oil and gas exploration including production platforms. During the recent Q3 earnings call, Kerry Chauvin, president and CEO, said that his company has not seen any effects of the credit crunch yet "because most of these projects were long-term projects and designed to be completed in the long run" and require long-term contractual commitments from its customers. He said that bidding activity had actually picked up in deep water during the quarter. Tidewater was also hit by shutdowns due to hurricanes. One positive was that its subsidiary Dolphin Services also benefited from additional repair work picked up due to hurricane damage.
In another sign of optimism, Transocean (NYSE:RIG), the world's largest driller, said that it just signed a contract for five years on a new drillship to be built next year in an Asian shipyard. Transocean wouldn't name the customer, but the contract is for five years.
Bottom Line
Small cap Energy companies are optimistic that any energy downturn will be short lived and self-correcting. Oil investors will be happy to know that these comments echo similar comments made by larger oil services companies.
For more on the energy industry, check out Oil And Gas Industry Primer and The Industry Handbook: The Oil Services Industry.
