In an ironic twist of fate, oilfield service and supply companies are not yet reporting outstanding earnings that might accompany strong oil prices-yet during the last 12 months, their stocks have enjoyed the biggest increase of any in the energy sector. Several institutional investors at the 28th annual Howard, Weil, Labouisse, Friedrichs investment conference noted this disparity and said they thought it might be time to take profits out of their service-stock holdings and look at E&P issues once more. But service-firm executives were unanimously bullish. "You could throw a dart now at the oil-service sector and make money," said Noble Drilling chief executive James L. Day. "The ride up is going to be bumpy, not smooth, however." When making their presentations, most service and supply executives de-emphasized financial results and focused on when the industry recovery will be in full swing. The general forecast is for drilling activity to pick up in second-half 2000 and definitely in 2001. At the conference, Baker Hughes Inc. said it now forecasts the average U.S. land rig count to increase 31% this year, with the offshore count going up 18%. The strongest recovery is predicted in Canada, where the rig count could go up as much as 43%. The international count is forecast to rise just 6%. Several executives commented that the recovery this time will be stronger than the one the industry experienced in 1995-97. Since then, many of the companies have grown by acquisition while simultaneously reducing debt or boosting their market share. "We see a 30% to 40% increase in earnings potential now versus the prior cycle's potential," said BJ Services chief executive Bill Stewart. Meanwhile, executives said they do not intend to passively wait for activity and day rates to recover. Some said they are already gently pushing for higher service prices or less discounting. They are also spotlighting new technologies, especially those relevant to deepwater exploration and production or the Internet. Tidewater chief executive William O'Malley said, "We see a very strong market in front of us, but a lot depends on bids we get by early fall. We think day rates have bottomed" for supply boats and other support vessels. The company has several large vessels under construction, with hopes they will be completed in time for the offshore activity recovery. "I'm expecting times ahead to be very good. This downturn was much shorter than the one in the 1980s, and the gas market looks very promising." For some companies, the key is the recovery in international operations. Noble Drilling's Day said that in 1999 some 77% of the company's revenues were from international operations; in 2000, that percentage will be lower, about 53%. Halliburton Co. reported $14.9 billion of revenues in 1999, but because 70% of its business comes from activity outside the U.S., and that marketplace hasn't recovered yet, chief operating officer Dave Lesar expects revenues to climb further. "Drilling services come back first, then as customers complete those wells, completion spending is the second phase. Finally the third phase is spending on production facilities," said Lesar. "We are most dependent on the second and third phases of the spending cycle, so our profits peak after the rest of the service industry." He emphasized technology, citing the company's new smart pipe, a composite that is lighter in weight. Power systems and electronics can be embedded into the walls of the pipe for downhole tools and sensors. "With this system companies should be able to get about 10% more reserves out of any particular field." He also said Halliburton has worked in some way on 80% of the world's deepwater completions. An announcement is imminent about what Halliburton plans to do with certain of its equipment companies acquired during the merger with Dresser Industries. "We think there is a high probability we are at the beginning of the up cycle and that this cycle will be better than the last one [in 1996-97]," said Nabors Industries CEO Eugene Isenberg. April 1997 to March 1998 were the best 12 months in the company's history, when it earned $1.40 per share. Today, having grown significantly by acquiring several drilling firms, including Pool Well Services, and assuming activity was equal to that 12-month period, Nabors' earnings per share would be at least $3.06, Isenberg said. -Leslie Haines

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