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Bloomberg: ‘At Shell, based in The Hague, earnings are predicted to decline 8 percent’

Bloomberg Headline: Oil Returns Most on Sale of Exxon, Shell, Buying Cameron, FMC

By Jim Kennett and Amy Strahan

Dec. 17 (Bloomberg) — Oil prices above $90 a barrel are doing more for shareholders of Cameron International Corp. and Baker Hughes Inc. than Exxon Mobil Corp. and Chevron Corp. A lot more.

Exxon, the world’s largest oil company, Chevron, the second-biggest in the U.S., and the rest of the industry are struggling to increase production and profits because the most promising new fields are miles beneath the ocean. Their difficulties are making Houston-based Cameron and Baker Hughes richer, since they provide the valves, pumps and fluids needed to extract crude from the waters off Brazil to the Arctic Ocean.

Producers will spend a record $369 billion on energy projects next year, 11 percent more than in 2007, Lehman Brothers Holdings Inc. estimated on Dec. 7. Services and equipment companies will return 22 percent in the next 12 months, double the gains of the oil companies, according to Sanford C. Bernstein & Co. forecasts.

Equipment makers are “a better place to be than the integrated oil companies because they’re still a growth industry,” said Cato Brahde, a portfolio manager at Isle of Man, U.K.-based hedge fund Tufton Oceanic Ltd. They’re in a “long- term sweet spot,” he said. Tufton’s $1.2 billion hedge fund is up 22 percent this year.

Even after increasing as much as 153 percent in 2007, services and equipment providers are cheap relative to profits. The 15-member Philadelphia Oil Service Sector Index trades at 16 times earnings, just above the record low in March. The Standard & Poor’s 500-stock index of major oil companies is near its highest PE since 2005.

Better Returns

Houston-based Halliburton Co., the world’s second-largest oilfield contractor, will gain 30 percent in the next 12 months in New York trading, and Baker Hughes will advance 26 percent, according to the average of analyst forecasts compiled by Bloomberg. Exxon, in Irving, Texas, and Chevron, based in San Ramon, California, will appreciate less than 4.4 percent, the data show.

An investor who took $10 million out of Exxon to buy Halliburton would boost returns sevenfold to about $3 million, according to data compiled by Bloomberg.

Producers are facing increasing challenges as governments from Caracas to Moscow cut access to deposits and demand higher royalties. In Russia, Royal Dutch Shell Plc, the second-biggest in the industry, ceded control of the $22 billion Sakhalin-2 gas project to state-run OAO Gazprom. Venezuelan President Hugo Chavez seized assets from Houston-based ConocoPhillips and Exxon.

“National oil companies are becoming more powerful and more protective of their natural resources, so we’ve seen the international oil companies in a big way spend money in the deep water,” said Peter Kinnear, chief executive officer at Houston- based equipment maker FMC Technologies Inc.

Growing Backlog

National Oilwell Varco Inc., based in Houston, locked in $8 billion of orders as of Sept. 30, quadruple its annual sales only four years ago. Cameron’s backlog grew to $4.13 billion. Analysts estimate their profits will increase about 23 percent next year, compared with 3 percent for Exxon. At Shell, based in The Hague, earnings are predicted to decline 8 percent.

Offshore drilling creates difficulties that can be costly for oil producers and profitable for the service companies.

BP Plc’s Thunder Horse, a production platform that cost more than $1 billion to build in the Gulf of Mexico, has yet to generate a penny for Europe’s second-largest oil company.

BP’s Delay

The 50,000-ton platform, with a deck the size of three football fields, was left listing after Hurricane Dennis in 2005, and undersea parts had to be replaced after a manifold leaked during testing. Pumping is scheduled to start in 2008, three years late and nine years after the discovery was announced.

Reserves at London-based BP have dropped the past three years and production fell in 2006, in part because of the delay. The only way Chevron stopped a three-year slide in production was by buying Unocal Corp. in 2006 for $20 billion.

Petroleo Brasileiro SA, Brazil’s state-controlled oil company, announced last month that the Tupi oil field in the Atlantic may yield 8 billion barrels of crude, making it the second-largest discovery in two decades. Five years after initial drilling in more than 10,000 feet (3 kilometers) of water, producers still may be a decade away from pumping their first barrel.

To reach the company’s target of extracting 1 million barrels a day by 2015, engineers will need to create systems stronger than any that exist today.

The Winners

“With this Tupi discovery, there’s going to be a lot of money just poured into this whole thing,” said Brian Gambill, who helps manage $18 billion at Manning & Napier Advisors Inc. in Rochester, New York. “It really sets off a boom.”

The winners will include National Oilwell, which makes rig motors and pipes to bore new holes, Baker Hughes and Smith International Inc., the producers of drilling fluids, and Cameron and FMC, the manufacturers of valves that complete the finished wells.

“From where we sit, it looks to us as though the whole service arena is the place to be right now,” said Don Hodges, the Dallas-based chairman of Hodges Capital Management, which manages $1.1 billion. He began buying Norwalk, Connecticut-based Bolt Technology Corp., which makes gears used to map underground reservoirs, in March at $28.68. The stock closed at $37.34 on Dec. 14.

Bernstein’s View

Sanford C. Bernstein analyst Ben Dell in New York estimates a group of 11 services companies, including Baker Hughes and Halliburton, will rise 22 percent next year, double the 11 percent gain for the 10 largest oil companies the firm covers.

Subsea equipment manufacturers track demand by following orders for so-called trees, the collection of valves and chokes atop a well that control production. There will be 669 subsea trees installed next year, up from 286 in 2006, according to an estimate by publisher ODS-Petrodata in Houston.

As systems become more complex, prices go up. FMC’s average subsea tree generates $19 million in revenue, up from $10 million a few years ago, Kinnear said.

“Anybody who has the technology to help out” in deep waters will be among 2008’s winners, said Jim Halloran, who helps manage $35 billion at National City Private Client Group in Cleveland. “These are big projects. They’re going to take a long time.”

Less Risk

Goldman Sachs Group Inc. analyst Arjun Murti, who first suggested the possibility of $100-a-barrel crude in 2005, lowered his 12-month price target for Exxon by 11 percent to $87 on Nov. 27. He also cut his targets for ConocoPhillips and Chevron because the U.S. economy may weaken, undercutting demand for oil and gas.

A decline in crude prices would do little to equipment and service providers, said James Wicklund, who helps manage $4.3 billion at Carlson Capital LLC in Dallas. The firm holds shares of National Oilwell, FMC, Cameron and Dril-Quip Inc.

“They’re going to continue to buy and install deepwater, subsea production systems whether oil is at $50 or $98,” he said.

To contact the reporters on this story: Jim Kennett in Houston at [email protected] ; Amy Strahan in Houston at [email protected] .

Last Updated: December 17, 2007 00:06 EST and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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