?“Fear wins the battle but greed will win the war,” says?Mark Urness, analyst at Calyon Securities USA, referring to oilfield-service stock values. While industry fundamentals remain strong and companies continue to exceed consensus earnings estimates, the recent decline in oil and gas prices has led to panic and fear among investors, he says.


It seems investors are currently ignoring the strong fundamentals, and while fundamentals will eventually win, valuations may remain low.?To reflect this, Calyon is?reducing its target price-to-earnings multiples across the sector by an average of between 1 and 2.


“We believe that oil-service fundamentals remain highly compelling. The independent E&P companies plan to spend aggressively in North America and the national oil companies have been very aggressive in the Eastern Hemisphere and Latin America. We believe that the visibility is nearly unprecedented and the growth during the next couple of years is pretty much locked in, provided crude oil stays above $80 per barrel?and?gas above?$7 per thousand cubic feet,” he says.


According to Urness, U.S. land-rig utilization is running at a high level. Offshore rig utilization is around 90% and all the newbuilds are finding work right away. There is still healthy offshore-rig building with 189 offshore rigs under construction. For every rig that gets delivered, another one gets ordered, says Urness. Most oilfield-service and drilling companies either achieved or exceeded consensus earnings estimates in the second quarter.

Also, Calyon expects?E&P capex to grow 20% in 2008 versus an earlier estimate of 12%.


“We expect rig counts, activity and spending to continue to move up despite?what the stock market seems to be indicating, which is that it’s all going to come to an abrupt end,” he says. “We believe that the market has been driven by panic, fear, negative sentiment and psychology rather than fundamentals, because fear and panic have pervaded the market?as the credit crisis continues.


“When commodity prices decline as rapidly as they have, there is a rush for the exits and many investors aren’t focused on fundamentals or valuations. We believe that the energy mini-bubble has burst, which will lead to a more healthy market environment with less speculation. Eventually, strong fundamentals will prevail.

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