The price of crude oil doubled from about $10 in July, 1986, to nearly $20 last week, and the number of active drilling rigs increased 63% over the same period. Both figures are expected to keep climbing, and industry analysts are bullish.
If the future's so bright, why are corporate insiders at Varco, an Orange-based drilling equipment maker, selling shares?
Varco Chairman Robert Ben Reinhold and his sister, Charlotte Reinhold Lorenz, confirmed that they have recently sold about 100,000 Varco shares each at $7.125 per share for a total of more than $700,000.
Although stock sales by corporate insiders often are interpreted as bearish signals, analysts say they do not consider the Varco sales cause for investor concern.
Stock prices in the oil services and equipment industry have been rising from extremely depressed levels caused by a severe industry recession, and officers, directors and major owners of many companies are selling shares for the first time in several years.
"They saw their stock go down and net worth deteriorate since 1980," said Earl Stolz, an oil services analyst at Howard, Weil Financial, a New Orleans brokerage firm. "When it came back, they wanted to put a little money in the bank."
Below All-Time High
Varco, which closed Friday at $7.125, up 12.5 cents for the week, was trading as low as $2.50 early this year. The stock is still far below its all-time high of $36, reached during the 1970s.
Reinhold, 62, who acknowledged that the stock had reached an attractive price, said he wanted to pay off some personal debt. "I'm getting older, and I've never sold any of my stock," he said.
Speaking of his sister's intentions, he said: "My sister isn't T. Boone Pickens. She's 65, she just got a nice condo in Houston, and she'd like to live a little more comfortably. I can't fault her for that."
Although his sister might not have the financial staying power of a Pickens, Reinhold pointed out that the Orange County family has maintained a sizable stake in the company through good and bad times. He said family members still control 25% to 30% of Varco's stock, including 1.5 million shares still owned by Reinhold and another 1.5 million by his sister.
Reinhold said he is bullish on Varco, which manufactures equipment that increases the efficiency of the drilling process, and he is ready to profit from the potential return of good times in the oil patch.
So are other investors and analysts.
Varco stock has more than quadrupled since falling to an all-time low of $1.875 per share last year. The stock has declined from an August peak of $9.625 as holders of convertible debentures exercised their right to convert their notes into common shares, which diluted the equity position of existing shareholders.
Analysts said they don't expect large price increases in Varco's stock over the next several months because investors have already discounted optimistic earnings projections for next year and as far ahead as 1989.
Analyst Is Optimistic
But over the next few years the stock is expected to rise, and the company might pleasantly surprise investors with its performance, according to George Gaspar, an oil services analyst at the Milwaukee-based brokerage firm of Robert W. Baird & Co.
Gaspar said Varco, which has consistently lost money since the oil industry began a five-year slide in 1981, should lose about 60 cents per share this year and begin making money in the second half of next year.
Other analysts are more optimistic. Russell J. Hoffman at New York-based Shearson Lehman Brothers expects Varco to make money as early as the first quarter of 1988.
Howard Weil's Stolz said Varco could post a profit of a penny per share in the fourth quarter of this year. For 1988, Stolz is projecting earnings of 25 cents per share.
Varco has about 20 million shares outstanding.
Varco's financial performance is expected to track the rest of the oil industry. The company's Top Drive drilling systems, which increase the efficiency of the drilling process by driving the drill bit from the top of the well derrick instead of from the floor, can be used on about 600 oil rigs now in operation, Stolz said.
Nearly 1,100 oil rigs were operating in the United States last week, contrasted with 670 in July, 1986.
Analysts said Varco's outlook has been further improved because it has reduced its debt from more than $60 million a few years ago to $27 million now.
"A lot of these companies are in trouble on their debt. Varco doesn't have that problem, and they always have been good at R & D," Hoffman said.
Analysts said the stock price will swing with the success of new products. Pipe-handling equipment controlled by microprocessors is being tested and could be on the market in 1989 or 1990, Reinhold said.
While analysts said another decline in oil prices could wrench the industry and result in reduced earnings estimates, Reinhold said Varco has become less dependent on oil prices than in the past and can make money even if oil falls to $15 a barrel.
"A few years ago, we weren't structured for what was to come. . . . We can succeed now."