Offshore Drilling Stocks Could Be On Target

It's either feast or famine for offshore oil drillers. Prosperity reigns when nastiness in the Middle East sends oil and natural gas prices rising--such as during May and June, when Mideast tensions sent crude oil prices above $23 a barrel. In recent months, however, reduced tensions have caused drilling stocks to plummet.

But this volatile stock group is looking enticingly cheap to contrarian money managers. "Business is lousy, and the stocks are doing poorly--and historically that's the time to buy these stocks," observes Daniel Frank, who runs the Fidelity Special Situations funds.

RATE TUMBLE. Offshore drilling mavens note that activity is picking up. That's even true in the Gulf of Mexico, where environmental restrictions have sharply reduced drilling activities, says Cliff Henry, an ace growth-stock picker whose Worthington Growth hedge fund has been buying into offshore drillers as a bet on gas prices.

Day rates--the amount that drillers are paid for use of the rig--seem to be bottoming out. In the Gulf of Mexico, the rates have declined from $20,000 a day in mid-1991 to $8,000 or less--dipping below the breakeven point for some companies. Henry says rates have been firming lately.

Henry's fund has been buying up the shares of a variety of drillers. Picks include Global Marine, Rowan Cos., Smith International, and Parker Drilling, as well as an oil-field-services company that specializes in offshore drilling, Oceaneering International. Global Marine is one of the best-known drillers, a highflier in the 1970s that fell on hard times when energy prices softened in the 1980s.

One plus for Global Marine is its recent settlement of a lawsuit with Transco Energy over a natural gas contract. Partly as a result of the settlement, in which it reaped $55 million, the company reported net income of 42 a share in the second quarter, vs. a loss of 2 per share the year before. Global Marine's average rig utilization was beneath 1991 levels in the second quarter--but above the industry average.

Global continues to be dogged by high leverage, however. By contrast, Parker Drilling, an onshore driller, has little debt and lots of cash. Parker has active drilling operations in Colombia, Indonesia, and New Guinea.

One imponderable for drillers is weather. Warm winters have depressed fuel prices and contributed to the industry's woes. But if the chill winds blow again, these companies will perform handsomely--and so will their stocks.

      Company          Share price     Price-
                         Aug. 24,   earnings
                           1992       ratio
      Global Marine           2         4.4
      Oceaneering Int'l      14        18.4
      Parker Drilling         5 3/8    44.8
      Rowan                   6 3/8     NA*
      Smith Int'l             8 5/8     NA*
      *Not applicable because of losses