Oil Services in the Trash Bin?
By Frank Barbera CMT. December 23, 2008
Life and its perverse twists, you just never know what you will run into, and perhaps nowhere is that more accurate than in the markets. Take the thriving sector for Oil Services, which over the last few days has checked in at the bottom of the Investors Business Daily Group rankings. That’s right, scanning the bottom few entries on the table from IBD, we see “Oil & Gas Machinery Equipment” at #195, “Oil and Gas Drilling” at #193, and “Oil & Gas Exploration” at #190. Now, keep in mind there are only 197 groups in the table! Thus, at #195, #193, and #190, the energy “finding” business would appear to be rock bottom. Of course, this implies that we have enough energy to meet future needs as a global economy, when nothing in fact could be further from the truth.
How the mighty have fallen, as names like TransOcean-Offshore
(-65.23%), Smith International (-79,37%), Helmerich & Payne (-77.97%), and Diamond Offshore (-62.02%) are all down in excess of 60% from the higher. Note: the figures in brackets are % decline high to recent low). Never mind that even in light of the anticipated drop off in earnings that could come from the steep decline in Oil prices, (as some day rates inexorably adjust downward) many of these companies remain in excellent financial condition, and in many cases are still operating in a climate of very high demand. Just look at the latest Offshore Rig capacity utilization rates for the various oil producing regions of the world and we see 80% to 90% rates across the board. In fact, so far, where deep water drillers are concerned, the utilization rates today are actually slightly higher than the rates which prevailed one year ago! On the subject of Day Rates, yes, it appears that day rates have been coming down, and yes, they seem to be down substantially off the highs. That said, current day rates are still very profitable for most of the offshore drillers, and are still at lofty levels when compared to the kind of rates which prevailed only a few short years ago. The only segment of drilling where rates have been sluggish for the last few years and remain so are for land drillers, which lagged throughout the last cycle.
|Current||Month Ago||6 Months Ago||1 Year Ago|
|Rig Type||Rigs Working||Total Rig Fleet||Average Day Rate|
|Drillship < 4000' WD||7 rigs||11 rigs||$214,633.33|
|Drillship 4000'+ WD||29 rigs||30 rigs||$355,210.00|
|Semisub < 1500' WD||13 rigs||22 rigs||$269,295.00|
|Semisub 1500'+ WD||74 rigs||86 rigs||$294,869.44|
|Semisub 4000'+ WD||58 rigs||67 rigs||$375,568.50|
Thus, it seems the market is over-reacting, tangled up in a huge bout of panic emotional selling akin to psychology of ‘the sky is falling’ where oil exploration is concerned. How ironic in that there is virtually no disagreement among leading experts as to the need for aggressively stepping up the level of Oil exploration in the years ahead. While ‘peak oil’ may be delayed, or may in fact have already been reached, there is a certain inexorability to the exhaustion of fossil fuels, and as aggregate supplies decline in the years ahead, the need for more Oil and alternative energy will soar. When viewed on a three to five year basis, it is hard to imagine a sector more important to the global economy than Energy and within Energy, Energy Exploration. As a result, I decided to do a little historical homework on the Oil Service group using some of my long term index data. My goal was to characterize the recent decline in light of the groups past high levels of volatility. In my work, I was able to go back to 1968 as a start, for a total span of 40 years. The charts that follow show graphically some of the nastiest, most concentrated declines in the history of this group.
Above: Oil Service Index May 2001 to September 2001 down 53.99% in 85 trading days!
Above: Oil Service sector May 5, 1998 to August 31, 1998 - down 62.47% in 82 trading days!
Above: Oil Service sector – March 1, 1991 to April 23, 1992 - down 46.48% in 290 trading days!
Above: Oil Services three large declines: 11/28/80 to 8/13/82 –68.74% in 430 days, 8/22/83 to 8/1/86 down 74.96% in 745 days, and middle of chart, 1987 crash, down 53.90% in 99 days.
Above: 11/73 to 10/74, Oil Services down 45.84% in 223 days
Above: Oil Services and the decline of 1969 to 1970, -55.39% in 224 days
In the table below, I summarize the historical track record showing the most severe, uninterrupted declines going back the last 40 years. In every case, there was no rally greater than 20% within the context of the tabulated decline. On the column to the far right, I show the total percentage decline as a function of the total number of trading days involved to create the decline, what could be called the ‘concentrated selling factor.” At present, the current decline, which is within whispering distance of the December 5th lows would rank second on the all time list of most concentrated declines; in my view, pretty remarkable stuff I see in the markets these days…
|High||Low||# of Trading||Aggregate||%|
Above: Oil service stocks relative to Large Cap Oils (top clip) and lower clip, long term RSI on the R/S Ratio. Oil Service stocks have been hit hard, really hard over the last few months, in what has been one of the worst episodes of concentrated selling ever...
I also see evidence of major extremes in comparing the downside behavior of Oil Service stocks to their large cap brethren. Again, this has been one of the most extreme one directional moves ever seen.
Finally, I end this update with a pair of interesting snap shots, the first with Crude Oil and the second showing Oil and the price action of leading issues over the last few days. On the Crude Oil chart, the Elliott wave structure now looks fully played out to the downside, with an extended third wave, and most recently, a fifth wave lounging down toward the lower trading band. This smacks of an oversold extreme.
Next, I point out that so far, despite a relentless string of new lower lows in the price of Oil (as measured roughly by USO), any number of leading issues thus far have NOT moved to lower lows. In my review of past historical precedent, this kind of subtle increase in relative strength is often a gauge of a building low, in this case, a low that could be quite the longer-range bottom.
Above: Oil Wave Count shows a full five waves down, with positive divergence on RSI.
Would not take much upside reversal from here to leave a compelling low.
Above: TransOcean (RIG) creating a double bottom? Possibly, as prices are refusing to follow Oil to new lows.
Above: SLB says “NO MAS”… Refusing to follow Oil to new lows.
Above: Oil Services as depicted by the OIH ETF, NOT confirming new lower lows in Oil, potentially very powerful bullish divergence.
Wishing Everyone a very Happy Holiday,
© 2008 Frank Barbera