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FOOL PLATE SPECIAL
An Investment Opinion by Dale Wettlaufer

It's Not Just Oil

Scanning the various business media yesterday, many reports on a rally in the shares of oil services and drilling companies characterized the move as confounding in the face of a drop in oil prices. Two problems with such an explanation point to factors that prospective investors in these ultra-hot sectors will want to consider when looking at such companies: 1. It's not just oil prices that matter to these companies, and 2. Futures markets are very efficient. Ignore them and focus on spot prices at your peril.

Companies such as Ensco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESV)") else Response.Write("(NYSE: ESV)") end if %>, Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %>, Reading & Bates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RB)") else Response.Write("(NYSE: RB)") end if %>, Rowan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDC)") else Response.Write("(NYSE: RDC)") end if %>, et al. do not exist in a world where natural gas prices don't matter. In fact, offshore rig utilization for the more commodity-oriented shallow water jackup rigs is highly dependent upon natural gas prices, especially in the Gulf Of Mexico, where exploration and drilling activities are highly gas-oriented. While some investors were perplexed by the move up in these shares, chalking up the rise to "pre-January effects," "dead-cat bounces," and whatever else have you, the more experienced watchers of the sector were looking at natural gas prices climb anywhere from 2.5% to 3.5%. The other part of the media coverage and some investors' analyses that misses the boat is a focus on spot prices, which isn't how drilling companies and energy producers look at the business. They look at futures prices.

While the spot price of natural gas moved up about 2.5%, natural gas futures -- especially January 2000 contracts -- made an even stronger move. For AOL readers, the place to look for these prices is keyword: Markets or directly in the futures part of that area. Energy producers must plan years in advance for exploitation of an oil or gas field, all the way from planning exploration and drilling, to considering how much the field will yield and how quickly it will yield its fruits, to evaluating margins in the downstream segment of the business -- at refineries and gas stations. Those executives aren't sitting on the edge of their seats looking at spot prices because they can sell oil and gas many years into the future through the commodities markets. This same thing holds true for companies like gold producers. While economists are talking about spot prices being below the cost of production, many companies are fulfilling the futures commitments they made in 1996, when prices for future gold deliveries reached well into the mid-$400 range. When in doubt, then, take a look as futures prices in both oil and gas and don't believe media reports that rely on spot prices for the horserace-like coverage.

UPS

Telecommunications billing systems provider International Telecommunication Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITDS)") else Response.Write("(Nasdaq: ITDS)") end if %> gained $2 3/4 to $24 3/4 after announcing yesterday that it has agreed to acquire for $100 million in cash and ITDS stock the cellular telephone billing unit of Computer Sciences Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSC)") else Response.Write("(NYSE: CSC)") end if %>. With quarterly revenues averaging $10 million last year, the acquired unit adds nicely to International Telecom's level of revenues, which has averaged about $5.6 million per quarter through nine months of 1997.

Business software company Platinum Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLAT)") else Response.Write("(Nasdaq: PLAT)") end if %> gained $1 15/16 to $25 15/16 after announcing an agreement with Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> under which Platinum will purchase Intel's LANDesk Configuration Manager, a software program that helps information technology departments manage enterprise computer networks. Intel will re-license the software, co-fund further development of the software, and will purchase a non-voting equity stake in Platinum.

Respiratory drug developer Dura Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DURA)") else Response.Write("(Nasdaq: DURA)") end if %> rose $2 7/8 to $46 5/8 as the company's shares will be added to the Nasdaq 100 index as of January 7. Other companies to join the index include Citrix Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTXS)") else Response.Write("(Nasdaq: CTXS)") end if %>, Jacor Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JCOR)") else Response.Write("(Nasdaq: JCOR)") end if %>, Chancellor Media Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMFM)") else Response.Write("(Nasdaq: AMFM)") end if %>, and Allied Waste Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWIN)") else Response.Write("(Nasdaq: AWIN)") end if %>.

Department store operator Dayton-Hudson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> jumped $5 1/16 to $67 1/16 after BT Alex. Brown and Morgan Stanley Dean Witter Discover reiterated their "strong buy" ratings and Prudential Securities reiterated its "buy" rating on the company. The company released no information to the general investing public on its holiday sales results, but told analysts yesterday that sales for the season came in above expectations. Dayton had reported right before Christmas that sales were below plan for the first three weeks of December.

Sungard Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SDS)") else Response.Write("(NYSE: SDS)") end if %> gained $2 3/4 to $31 5/16 after the maker of financial markets software and provider of data backup services announced that Japan's Sumitomo Trust & Banking Corp. has licensed its Panorama global risk management software. Some wags might suggest that risk management software sales might be picking up on the western side of the Pacific Rim.

Credit card issuer Providian Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVN)") else Response.Write("(NYSE: PVN)") end if %> rose $2 13/16 to $45 1/16 on announcing that it has purchased $1.1 billion in unsecured credit card receivables from super-regional bank First Union Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %>. Providian said the addition to its managed receivables portfolio will be accretive to 1998 EPS and will help the company surpass its yearly EPS growth goal of 22 to 25%. The mean First Call earnings estimate for 1998 looks for EPS growth of 24%.

Aerospace fasteners and engine parts manufacturer and distributor Fairchild Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FA)") else Response.Write("(NYSE: FA)") end if %> added $1 1/2 to $23 5/8 after announcing yesterday that it is calling three bond issues: its 12% 2001 debentures, 13% 2007 debentures, and 13 1/8% 2006 debentures.

Machine tool manufacturer Bridgeport Machines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BPTM)") else Response.Write("(Nasdaq: BPTM)") end if %> rose $1 1/2 to $12 1/2 after announcing that it expects to report Q3 EPS of $0.22 to $0.26, kicking the heck of the First Call mean estimate of $0.09. Unexpected strength in European orders has contributed to the strong quarterly performance with the company reporting an estimated quarter-end backlog of $36 million, up 23% from last quarter.

DOWNS

Biopharmaceutical company Cadus Pharmaceutical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KDUS)") else Response.Write("(Nasdaq: KDUS)") end if %> lost $1 3/4 to $6 1/8 after announcing the sudden departure of Dr. Jeremy Levin as the company's Chair and CEO. Dr. Levin will remain associated with the company as a member of the Board of Directors. Investors took this as a cue that things were not completely kosher at Cadus, although nothing explicit was said.

Global positioning systems manufacturer Trimble Navigation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRMB)") else Response.Write("(Nasdaq: TRMB)") end if %> was knocked off course for a $3 1/8 loss to $21 1/8 after Schroder & Co. cut its rating on the stock to "neutral" from "buy."

Electronics design automation software company Synopsys Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNPS)") else Response.Write("(Nasdaq: SNPS)") end if %> fell $2 21/32 to $36 13/16 after advising analysts (apparently hoping that the news will somehow trickle down to their individual and otherwise non-institutional investors) that it thinks Q1 EPS estimates of $0.43 are too high. According to Reuters, SoundView lowered its rating to "short-term hold" from "short-term buy" after the company said it "...moved some Viewlogic [an acquired company] revenues into backlog and managed the sales force transition." Cowen & Co. reiterated its "strong buy" rating on the shares this morning as Synopsys assured analysts that it believes the acquisition will be accretive to full-year earnings.

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Randy Befumo (TMF Templr), Fool One

Dale Wettlaufer (TMF Ralegh), Fool Two

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