Mr. Syed: Certainly, the oil service space was one of the main outperformers last year. It did exceptionally well. The main outperformers were the Big 3 service companies, led by Schlumberger (SLB), the subsea products companies and the construction companies. The deepwater drilling sector did very well also and finished the year very strongly. Deepwater drillers like Transocean (RIG), Atwood Oceanics (ATW), and Diamond Offshore (DO) performed exceptionally well following their third quarter earnings releases. Some of the North American land drillers and pressure pumping companies lagged quite a bit. They were major underperformers. Our view is that prior to 2007 OSX performance was broad-based. In 2007, outperformance narrowed to Schlumberger, subsea products companies and deepwater drillers. I think in 2008 you may see outperformance in an even narrower group of companies with many more laggards and very few big winners.
TWST: Mark, how do you characterize the past year?
Mr. Urness: Waqar summed it up pretty well. It was a year where we had
bifurcated performance. The large cap and mid-cap equipment and deepwater
drillers outperformed all of their counterparts with heavy North American
exposure. I think you are probably going to see a repeat of that bifurcation
again this year because, at least from this vantage point, it doesn't look like
we are going to see any meaningful improvement in the US or Canada, while
conversely we have a very strong outlook for Latin America and most if not all
of the Eastern Hemisphere markets. I think last year was a great year, but when
stocks are up 50% on average and the OSX is up about that much, this year we are
not going to see that much upside. Our target for the OSX is a little over 300,
312 I believe.
The questions are, will we see continued earnings outperformance and what will
the valuations do? Last year we had multiples contraction throughout the year,
yet we had a lot of upward earnings revisions for companies like National
Oilwell Varco (NOV), etc., and that certainly helped the group. This year it's
going to be a more challenging environment to see that same kind of earnings
outperformance, and valuations are hovering at near all-time lows. It was a good
year last year, but it will be a bit more challenging in 2008.
Tickers included in this excerpt: ATW, BHI, BRNC, CAM, DO, HAL, HLX, NBR, RIG, SII, SLB, WFT
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.