[David Haffenreffer, Cnn Anchor:] While politicians and oil producers squabble or possibly because of their squabbling there has been a rally in oil stocks of late, as well as in stocks of oil field service and drilling companies.
[Deborah Marchini, Cnn Anchor:] Oil field services analyst Robin Shoemaker of Bear Stearns is here with us to talk more about this. Welcome to AHEAD OF THE CURVE. And, Robin, this was a sector that really took off yesterday.
[Robin Shoemaker, Bear Stearns:] Yes, the catalyst yesterday was Smith International, which reported that it will, in the first quarter, exceed analyst estimates by a considerable margin. And that sparked some renewed interest in the group because they're now earning money as opposed to talking about it in the future.
[Marchini:] Exactly. And to what extent does that generalize? If one company is going to do well, is it fair to say that the others will also?
[Shoemaker:] Well, I think this was a preview of better earnings to come because this company has its primary business in Canada and the United States where activity has picked up quickly. But the recovery in oil field activity is starting to spread around the globe. Other companies will follow in Smith's path.
[Haffenreffer:] Yes, we did have the price of oil, light sweet crude, in the U.S. yesterday down 35 cents, $27.46 a barrel. Obviously we're down from the above-$30-a-barrel area. What are your expectations for the price of oil, and how will this affect this sector?
[Shoemaker:] Well, we think oil prices will settle in a range of $20 to $25 a barrel within the next six to nine months. And at that level, the oil companies themselves have ample incentive to drill for new oil and gas reserves.
[Marchini:] Question for you: How long do prices have to stay at $20 to $25 a barrel before oil companies are willing to actually make the investment?
[Shoemaker:] Well, they have to stay there, obviously, for several years, but I think we're in the early stages of a three- to five-year upturn in oil and gas drilling worldwide based on the $20 to $25 price. Now, if we go below 20 and we see any evidence that we're going to have a repeat of 1998, then my scenario would not prove to be correct. But I believe that we're on a three- to five-year upturn here, and in the very early stages.
[Haffenreffer:] You expecting any surprises out of the OPEC meeting next Monday?
[Shoemaker:] Well, we don't have a lot of expectations going into it other than they are going to raise production by at least a million barrels a day, and perhaps as much as two million barrels a day. But that increase in production is needed to prevent oil prices from going higher. And when they do increase production, we think the price will slowly come down in a kind of a soft landing between $20 and $25 a barrel.
[Marchini:] This is not exactly an undiscovered sector. I mean, the price of oil has pretty close to tripled in the past year, and oil services companies have responded with the stocks going up. Are there any that still represent reasonable bargains?
[Shoemaker:] Yes, I think that companies like Baker Hughes and Halliburton, which are two of the biggest oil service companies, have lagged a little bit here, and they are two of my top picks in the group right now.
[Haffenreffer:] Smith International already...?
[Shoemaker:] Smith International has done very well. And at this point, I would favor Halliburton and Baker Hughes because they will be reporting the kinds of earnings surprises a few quarters down the line that Smith did yesterday.
[Marchini:] All right. Robin Shoemaker of Bear Stearns, the oil- services analyst, we thank you so much for being with us this morning.
[Shoemaker:] Thank you. Search CNN.com CNNSI.com CNNmoney.com The Web