OSLO - The changing notion of "high" oil prices and surging demand from Brazil are triggering a revaluation of oil services companies and raising hopes the industry's five-year upswing will last well into the next decade.
Analysts say offshore valuations had been capped by market belief that oil prices, only last year deemed expensive at $75 per barrel, will eventually fall and end the boom.
But as the view takes hold that oil could for the foreseeable future stay above $100 a barrel -- or even near its current $125 -- more break-neck expansion is being priced in by markets.
"The re-rating of the energy sector is now underway," Morgan Stanley said in a note last month, raising its target multiples for oil service, equipment and contract drilling stocks "to account for multiple expansion across the energy sector".
It said the market's "unwillingness to re-rate energy" -- with the oil services sector trading at a 24 percent discount to the S&P 500 .SPX -- was "symptomatic of a lack of belief in sustainability of energy prices and energy earnings".
Morgan Stanley expects oil services and equipment companies to trade at an average of 14.6 times 2010 earnings, up from its previous view of 13.8 times. It expects drillers, on average, at 9.6 times 2010 earnings, up from 9.3 times.
In Norway, which has a large chunk of Europe's offshore oil services market, the sector's eight top companies jointly showed a 15 percent rise in first-quarter operating profit but lagged average forecasts in Reuters polls of analysts by 3 percent.
The results displayed both greater earnings power and the risks of cost inflation and project delays, said analysts.
"The outlook for the sector is extremely good if oil is at $90 or $150 (per barrel), but it's not that easy to find cheap companies," Hans Thrane Nilsen, a fund manager at Norwegian insurer Storebrand, told Reuters. "The boom is set to last for a long time, really until the world starts using less oil."
NORWEGIAN CARNIVAL
The biggest Oslo-listed driller, Seadrill (SDRL.OL: Quote, Profile, Research), said that surging global demand, including from the oil world's latest darling, Brazil, would easily absorb the 80 deepwater drilling units and 84 jack-up rigs on order around the world.
"It seems market demand is able to absorb the supply increases ... and this has yet to adversely affect the terms and dayrates, in particular for deepwater units," Seadrill said when issuing first-quarter results last week.
Petrobras has said that giant deepwater discoveries made off Brazil may generate demand for up to 40 more new rigs over the next year five years. Analysts say that may boost Norwegian drillers who, unlike more cautious U.S. peers, have built rigs without orders and locked up valuable slots at shipyards.
Merger and acquisition activity, recently rekindled by smaller deals aimed at security rig capacity, may too drive up valuations but eat into development spending and dividends.
"We are likely to see M&A as new rigs are delivered to Norwegian start-ups which would be taken over by the big guys in Houston -- which were late in ordering but have the knowledge, contacts and contracts," Storebrand's Nilsen said.
Soaring rig capacity will enable the development of more fields and boost orders for subsea equipment and pipelines, a boon for companies such as Subsea 7 (SUB.OL: Quote, Profile, Research), Acergy (ACY.OL: Quote, Profile, Research) and Norwegian engineering powerhouse Aker Solutions (AKSO.OL: Quote, Profile, Research).
"Concerns over a dwindling backlog (by Aker Solutions) should dwindle as the cycle gushes on," Handelsbanken said in a note, raising its earnings per share view for Aker Solutions, formerly Aker Kvaerner, by 3 and 5 percent in 2008 and 2009.
The higher growth trajectory predicted by analysts for the oil services sector could tumble if the global economy falters and demand for oil and gas drops.
Norwegian broker Fondsfinans said growing rig capacity would also lead to a "gradual return to mid-cycle profitability" for the sector during the first half of the next decade.
Analysts say offshore valuations had been capped by market belief that oil prices, only last year deemed expensive at $75 per barrel, will eventually fall and end the boom.
But as the view takes hold that oil could for the foreseeable future stay above $100 a barrel -- or even near its current $125 -- more break-neck expansion is being priced in by markets.
"The re-rating of the energy sector is now underway," Morgan Stanley said in a note last month, raising its target multiples for oil service, equipment and contract drilling stocks "to account for multiple expansion across the energy sector".
It said the market's "unwillingness to re-rate energy" -- with the oil services sector trading at a 24 percent discount to the S&P 500 .SPX -- was "symptomatic of a lack of belief in sustainability of energy prices and energy earnings".
Morgan Stanley expects oil services and equipment companies to trade at an average of 14.6 times 2010 earnings, up from its previous view of 13.8 times. It expects drillers, on average, at 9.6 times 2010 earnings, up from 9.3 times.
In Norway, which has a large chunk of Europe's offshore oil services market, the sector's eight top companies jointly showed a 15 percent rise in first-quarter operating profit but lagged average forecasts in Reuters polls of analysts by 3 percent.
The results displayed both greater earnings power and the risks of cost inflation and project delays, said analysts.
"The outlook for the sector is extremely good if oil is at $90 or $150 (per barrel), but it's not that easy to find cheap companies," Hans Thrane Nilsen, a fund manager at Norwegian insurer Storebrand, told Reuters. "The boom is set to last for a long time, really until the world starts using less oil."
NORWEGIAN CARNIVAL
The biggest Oslo-listed driller, Seadrill (SDRL.OL: Quote, Profile, Research), said that surging global demand, including from the oil world's latest darling, Brazil, would easily absorb the 80 deepwater drilling units and 84 jack-up rigs on order around the world.
"It seems market demand is able to absorb the supply increases ... and this has yet to adversely affect the terms and dayrates, in particular for deepwater units," Seadrill said when issuing first-quarter results last week.
Petrobras has said that giant deepwater discoveries made off Brazil may generate demand for up to 40 more new rigs over the next year five years. Analysts say that may boost Norwegian drillers who, unlike more cautious U.S. peers, have built rigs without orders and locked up valuable slots at shipyards.
Merger and acquisition activity, recently rekindled by smaller deals aimed at security rig capacity, may too drive up valuations but eat into development spending and dividends.
"We are likely to see M&A as new rigs are delivered to Norwegian start-ups which would be taken over by the big guys in Houston -- which were late in ordering but have the knowledge, contacts and contracts," Storebrand's Nilsen said.
Soaring rig capacity will enable the development of more fields and boost orders for subsea equipment and pipelines, a boon for companies such as Subsea 7 (SUB.OL: Quote, Profile, Research), Acergy (ACY.OL: Quote, Profile, Research) and Norwegian engineering powerhouse Aker Solutions (AKSO.OL: Quote, Profile, Research).
"Concerns over a dwindling backlog (by Aker Solutions) should dwindle as the cycle gushes on," Handelsbanken said in a note, raising its earnings per share view for Aker Solutions, formerly Aker Kvaerner, by 3 and 5 percent in 2008 and 2009.
The higher growth trajectory predicted by analysts for the oil services sector could tumble if the global economy falters and demand for oil and gas drops.
Norwegian broker Fondsfinans said growing rig capacity would also lead to a "gradual return to mid-cycle profitability" for the sector during the first half of the next decade.
