Second-quarter revenues for oil-service firms were through the roof. Of 27 service companies on the Oil and Gas Investor This Week scoreboard, all posted revenue growth compared with the same period last year, and nearly half reported 40% or more growth. Is it too much to expect repeat performances in the coming quarters? Some analysts answer "no." "With accommodating macro energy fundamentals, improving E&P cash flow generation and balance sheets, and relatively low E&P cash-flow-reinvestment ratios, coupled with increasingly acute oil-service capacity constraints, we continue to believe that we are in the relatively early stages of a prolonged expansion in drilling activity," analysts at Simmons & Co. International report. "Thus, we believe that Street estimates for the oil-service sector continue to be too low and that oil-service stocks are cheaper than they look, especially given the unrestrained pricing leverage and corresponding profit acceleration presently enjoyed by the industry." Several companies on the upper half of the scoreboard are making moves that are reflections of the whole group. National-Oilwell Varco Inc.'s log of new orders more than doubled sequentially to $735 million in the second quarter, pushing its backlog up to $1.2 billion, reports Kevin Wood, an analyst with Susquehanna Financial Group. He rates the shares Neutral. Dayrates for Grey Wolf's lower-end rigs have improved by $800 during the second quarter, while higher-horsepower rigs experienced a $2,000 gain, says Robert E. Ford, an analyst with Sterne, Agee & Leach. In late April, he adds, Grey Wolf had 37 rigs at work under term contracts; the company now has approximately 50 rigs under contract with an average length of 12 months, and he expects the number to increase to about 58 by the end of the third quarter. He has a Buy on the shares and a $10 target. For more on this, see the October issue of Oil and Gas Investor. For a subscription, call 713-993-9320, ext. 126.
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