Oil services cos going cheap as crude fears overdone

By Tom Bergin, European Oil and Gas Correspondent - Analysis

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.