STREETWISE: High-priced gas is good news

Let’s say you’re sitting behind the wheel of one of those two-ton SUVs burning up fuel at something like a gallon for every eight miles of suburban driving, where we understand all-wheel drive capability to be most critical.

I’m guessing that no matter how high above the traffic you ride, refueling at $1.60 a gallon (make that $2 if you’re on the West Coast) has got to hurt.

Well, fear not, because help is on the way.

Opec is expected to increase oil production by about a million barrels a day. For you SUV owners, I think that equates to one trip to the market and two trips to soccer practice. But I digress.

The Organization of Petroleum Exporting Countries, one of the few outfits operating with excess capacity, will likely make similar moves to increase production again this summer and fall.

In the meantime, all that bold gasoline consumption has helped to drive oil prices north of $33 a barrel,well beyond the $18 range that the major oil producers need to make money on new drilling efforts.

For investors, this should result in some bullish calls later this year for certain stocks in the oil services sector.

Analysts say the moves by Opec, which produces about a third of the world’s 75 million barrels of oil a day, will lower the price of fuel, but not so much that it becomes unprofitable for new drilling.

Because the cycle from drilling to production typically takes a couple of years, corporations like Exxon, Texaco, Mobil and Chevron have been patiently waiting for a point at which oil prices will be able to hold steady at a profitable rate for a sustained period, preferably several years.

Brian Clifford, manager of the SunAmerica Growth Opportunities Fund, says that time is now.

This translates into big business for leading oil services companies and their suppliers.

Some companies, including Marine Drilling, Global Marine, and Ensco International, have already seen their stock prices rise in near lock-step with the price of oil, which has been climbing steadily from $10 a barrel in early 1999.

about to hit pay dirt

“We’re at the point now where activity in oil services is on the cusp of real earnings growth,” Mr. Clifford says.

Sun Life of Canada analyst Joe Bozoyan concurs, but suggests there are still some stocks that have not yet seen the benefits of high oil prices.

Specifically, he likes Transocean Sedco Forex, Diamond Offshore Drilling and Noble Drilling — all companies that provide more of the deep-water drilling rigs, which have gotten less attention than shallow-water rigs so far.

What makes oil services companies — drillers and their suppliers, in particular — attractive is their fixed-cost status. This time, it’s likely to start manifesting itself in the summer and linger a while.

“We’re targeting the second half for this sector, and we expect to be very bullish in 2001,” says Robert Ford, an analyst with CIBC World Markets in New York. “Until now, the majors have been sitting with their hands in their pockets.”

Hmm. Suddenly the idea of filling that 35-gallon tank on the SUV doesn’t seem so unbearable, does it?