Energy Finance

Although the market is discounting doom and gloom for the oil service and drilling companies, the growth story is not yet over, says Mark Urness, analyst at Calyon Securities.

“We expect oilfield service and drilling companies to show 7% sequential earnings growth in 3Q08, in line with the two-year average. We estimate growth in the U.S. land drilling market and the seasonal pick-up in Canada to result in strong sequential earnings growth, offset by losses due to the hurricanes.

“However, due to the current financial crisis, we now anticipate reduced E&P spending and a rig count decline in 2009, particularly in North America. As a result, we recently lowered our 2009 EPS estimates by an average of 9%.

“We expect SLB to miss the consensus EPS estimates by $0.02 despite strong sequential earnings growth of 6%. We believe that BHI and NOV have the potential to exceed consensus earnings estimates. We estimate the large-cap service sector will show 9% sequential earnings growth in 3Q08. Among the mid-cap service companies, we see subsea equipment manufacturers such as CAM and FTI as most likely to exceed consensus expectations. BJS, partly impacted by hurricanes, expects 3Q08 EPS to be in the $0.55-$0.57 range.

“Due to continued strength in U.S. land drilling activity, rising day rates and higher utilization, we believe the land drillers will report higher margins in the core U.S. onshore drilling business. We expect the land drillers such as HP and BRNC to exceed consensus EPS estimates by $0.03 and $0.01 respectively while UNT may report a miss due to lower natural gas prices.

“We believe that the deepwater drilling companies such as DO and RIG have the potential to exceed the Street’s estimates. The GOM jackup drillers are well positioned in this group with solid day rate improvements and rollovers at higher-than-expected day rates seen in 3Q08 despite hurricanes impacting manufacturing at RDC’s LeTourneau facility and HERO’s liftboat and barge businesses. HERO expects 3Q08 EPS to be in the $0.36-$0.38 range.

“Considering the recent sell-off, we estimate the OSX has substantial remaining upside, despite the slowing growth. We reiterate our Overweight rating on the sector with a 12-month OSX target of 246,” he says.

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