Focus on oilfield service companies
Interview: Friedman Billings Ramsey & Co.---MacKenzie, Robert---Analyst
>> shares of practice works rose as much as 20% today because eastman kodak has agreed to buy this company. they are a maker of dental imaging equipment and software, and the deal is worth about $500 million in cash. now, the world’s biggest maker of x-ray film will pay $21.50 a share for practice works. kodak will also assume $34 million in debt and transaction fees. practice works will be folded into the company’s health imaging unit which accounted for 18% of kodak’s sales last year. kodak says the deal will add $215 million to their annual revenues. turning our attention to the oil markets right now, specifically the oil services stock , companies like smith international reported their earnings today. smith international actually beat the street’s estimates by four cents, earnings 30 cents a share. and the company’s shares fell by 2% today. meanwhile weatherford international met earnings estimates, 31 cents a share for this 2q and the stock fell close to 3% today. b.j. services and schlumberger, they are set to report their numbers tomorrow. what can we expect from them? here to help us answer that question, rob mc quen ski, he covers the group and he’s joining us live from arlington, virginia today. thanks for being with us. got to ask you first off about these two companies that reported tand whether they beat or miss a as stocks sold off. why do you think?
>> thanks for having mees suzy. i think the stocks sold off largely today in response to the market selloff. we saw the broader market down roughly in line with the oil field service stocks . weatherford traded off a little more than smith did in my not, because they just met numbers. perhaps in terms of the quality of their earnings they may have been a little less than expected due to about 3 cents per share of foreign exchange gains. nevertheless the whole group sold off out of the energy stocks today on the falling of oil prices to a certain extent this morning.
>> so does that concern you if a stock can’t take good news or bad news, does that worry you about the entire group?
>> no, i’m not worried about the entire group. we tend to see the group moving the and we saw the stocks with the best news today. smith international and also as a derivative play of b.j. which has leveraged very much of the same markets outperform the group, albeit they were still down slightly. the stocks are very volatile and we have many of the hot money accounts on the street right now. we expect them to ebb and flow with some of the flows of money in and out of the group. nevertheless we believe the long-term fundamentals are solid driven both by growth internationally as well as strong north american natural gas stories.
>> also then, earnings coming out tomorrow. what can we expect to hear from b.j. and schlumberger?
>> the themes we’ve heard from smith and weatherford today were very much one of a very strong u.s. land market. somewhat weak u.s. off-shore market and a surprisingly strong recovery in latin america, driven by mexico and venezuela. we expect more of the same from b.j. and schlumberger tomorrow. in particular we think both of those stocks have upset potential to their earnings estimates. we are at 31 cents e.p.s. estimate for b.j. tomorrow, the high end of their guidance range consensus is 30 cents. we believe they have the potential to beat our estimate by one to two cents based on their strong presence in mexico. secondly, schlumberger is also exposed to those two markets but more so than that we think aggressive cost cutting efforts under way at company under the new management team are likely to lead to a substantial potential for upside earnings.
>> oil industrial overall. people are saying among the biggest risks is the destruction that we are seeing right now, the demand destruction in natural gas, because the prices have gone up so much that there are alternative ways and people are cutting back on their alternatives that are being used. how do you see that as a risk going forward?
>> that’s been the biggest impact on natural storage levels. in our view moderating of natural gas levels from the $6-plus range to $5 is beneficial in mitigating demand. $5 is equivalent to somewhere around $30 oil. when you put it in that perspective, based oren the current prices of the two commodities there seem sooems to be a much lower potential as further demand goes forward whereas we still have continued declines in supply in north america. add to that what we see coming out over the next couple years with regard to coal fired power plants, incremental demands for natural gas being generated by increased emissions restrictions for coal fired power plants, leading to a 5% to 7% increase in supply that’s going to be required just to meet the growth in demand for electricity generation over the next two years.
>> let me ask you, our viewers there looking to get into this sector, one particular stock that you like that you think is going to be the winner over the next 12 to 18 months.
>> sure, suzy. my top pick right now is halliburton, outpr form rating, $29 target. my investment thesis on this stock is predicated on the company going through and completing the negotiated settlement of its asbestos liability. we’ve gone with the ebbs and flows of the hatch bill going through the senate right now past the committee. it’s now going toward the full senate a little bit. but nevertheless, that is in my mind a free call up for halliburton. but our thesis is not predicated on that. we believe the negotiated settlement they have by themselves is more than sufficient to provide four to $5 upside potential to the stock , minimal downside potential.
>> rob, we thank you for being with us today. rob mckenzie, the analyst for billings ramsey. when we come back we’ll talk about the pickup in the economy.
