Oil services cos going cheap as crude fears overdone

LONDON (Reuters) - The 20 percent drop in oil prices from a record high above $147 a barrel in July has hit shares in European and U.S. oil services companies too hard as investors obsess about crude, analysts and industry executives say.

Companies like Britain's Petrofac (PFC.L), which build or operate oil production facilities, get paid their contractual rate whether crude prices rise or fall, unlike field owners whose revenues swing sharply.

"The factors that affect our business are not at all correlated to the short term oil price ... the long term factors which affect our business have not changed in the last two months," said Petrofac Chief Financial Officer Keith Roberts.

However, shares of U.S. and European subsea engineering companies, pipemakers, drillers and rig operators have fallen around 20 percent in since end-June, said Keith Morris, oil analyst at Evolution Securities -- almost twice the fall in shares of oil majors such as BP Plc (BP.L).

"There was a knee jerk reaction not just in the exploration companies but in the oil services as well," Morris said.

The UK oil services sector is trading at a price-earnings ratio of just 11.3 times, outside the historic range of 12.6 to 19.3 times, despite the most buoyant outlook in years, Credit Suisse said in a research note.

The bank predicts UK services companies such as Wellstream (WSML.L) and Wood Group (WG.L) will, on average, produce earnings growth of almost 30 percent in coming years.

Industry executives have watched in dismay as their shares have collapsed, as they believe the fundamental outlook for their revenues has not changed.

"We're baffled by the flood of money out of the sector," said one industry source.

Oil services executives say their revenues will hold up in spite of crude price drops because oil companies currently plan on the basis of prices in the range of $60-$80/barrel.

Brent traded at $119.21 a barrel at 0930 GMT and forward prices show traders expect crude to stay around $120 until 2013 at least.

Analysts agree that crude prices are likely to stay at levels which will allow oil companies grow their capital spending on new projects, further boosting service companies revenues.

TIME TO DELIVER

Some investors counter that while the fall in oil prices has weighed on services companies' shares more than it should, justified fears about the service industry's ability to turn a great environment into profits have also played a big role.

Oil companies started to boost their spending sharply in around 2004 and many projects committed to in recent years are now under construction.

A tight market for subcontractors and components has meant that some oil services companies have failed to deliver projects on time and without flaws.

"Everyone knows the fundamentals for the industry are great but the cycle has been changing and you're now in execution mode," Frederic van Parijs, Senior Investment Manager, Energy, at ING Investment Management in The Hague.

"What you see is that some of these companies cannot live up to expectations, not because the end market is not so strong, but it's about good execution."

Increasingly frequent delays in approving big projects have also weighed on the sector, van Parijs said.

On Thursday, Kuwait delayed tenders for contracts on a $15 billion upgrade of two refineries while Royal Dutch Shell Plc (RDSa.L) has repeatedly said the rising of building facilities was delaying investment decisions on liquefied natural gas plants and other big ticket projects.

This trend has hurt expectations for the services sectors' growth in 2009, Goldman Sachs said in a research note last week, in which it raised its view on the sector to "Attractive" from "Neutral", citing the recent share falls.

The fact the slide in oil services shares started in late June, when crude was still powering toward record highs, supports the view it is not entirely driven by crude.

However, a 3 percent rise in service stocks on Thursday, driven by a 5 percent rise in crude prices, supports analysts' claims that crude is and will remain a key driver.

Several European oil services companies report their first half earnings next week, including Britain's AMEC (AMEC.L) and Norway's SeaDrill (SDRL.OL).

Sources close to some of the companies said management would likely, again, issue optimistic statements about the future of the industry and they hope this will improve sentiment toward their shares.

(Editing by Louise Ireland)