Upgrading Two Oil Services Companies

BJ Services (BJS ) and Weatherford Intl (WFT ): Upgrading both stocks to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Tina Vital

Oilfield service stocks were up 9% this week on signs OPEC will stabilize basket oil prices at $22-$28/bbl, boosting outlook for oil drilling. Also, U.S. interest rates cuts improves the 2002 economic outlook, including energy demand. S&P expects U.S. natural gas prices to rebound on supply response to this year's cut in activity. These factors should benefit oilfield service companies, especially those like BJ Services and Weatherford with international focus. With shares off 52-week highs by 35%+ and valuations near recent lows, S&P recommends buying both stocks.

Vintage Petroleum (VPI ): Downgrading to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: John Kartsonas

The independent oil company reported Q3 EPS $0.10 vs. $0.92, below Street estimates. The company reduced its production outlook for 2001 and 2002, and cut its 2002 capital budget by 9%. Look for production to grow about 10% in 2002, but production revenues to decline about 12% on weaker commodity price environment. S&P sees 2001 EPS at $2.14, 2002's at $0.89. Debt/total capital ratio now is 58%, well above peers, and 2002 interest coverage ratio estimated at 4.5. With shares trading in line with our net asset value based on 2000 proven reserves, S&P recommends holding for now.

Palm Inc. (PALM ): Still 3 STARS (hold)

Analyst: Megan Graham-Hackett

Palm Inc., maker of the eponymous handheld device, confirmed its second quarter earnings view and announced the resignation of its CEO Carl Yankowsi. Graham-Hackett said she had long expected the CEO to be replaced given PALM's recent poor execution and struggle to define a compelling strategy for the corporate market.

Chairman Eric Benhamou will hold the CEO spot as the company searches for a replacement. The company still expects to see flat revenues in the second quarter, which we also see as achievable given PALM's recent recovery of some market share. Graham-Hackett continues to see a fiscal year 2002 (May) loss of $0.24.

Walt Disney Co. (DIS ): Still 2 STARS (avoid)

Analyst: Thomas Graves

Before charges and asset sale gain, Walt Disney reported a fourth quarter earnings per share of $0.06 versus pro forma $0.11, which was a penny below Wall Street estimates and $0.03 below Graves' estimates. Graves said he is lowering his fiscal year 2002 (Sep.) earnings per share estimate to $0.66, from $0.80, with about $0.26 a share benefit from expected change in goodwill accounting.

Despite lower expected capital spending, Graves said to look for Disney after-tax free cash flow to decline at least 10% in fiscal year 2002, totaling roughly $0.60 per share. Longer-term, Graves sees a more favorable picture, including benefits from growing demand for digital video disks and the opening of international theme parks.

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