Slowing growth in rig counts will limit prices, profit margins for onshore oil, natural gas drillers and well service companies in 2012, analyst says

NEW YORK , October 12, 2011 () – Analyst cuts forecast for oil and gas drillers, well service companies on slowing rig growth

An analyst on Tuesday dramatically reduced his 2012 earnings estimates and price targets for onshore oil and gas drillers and well service companies on an expected slowing rig count growth.

THE OPINION: Jefferies analyst Judson E. Bailey said that while he thinks the slowing growth in rig counts will limit prices and profit margins for drillers and servicers next year. Still, he maintained "Buy" ratings for nearly all the drillers because he thinks they have been sold off too harshly. He also thinks observers are expecting rig growth to slow more dramatically than he currently expects.

He now predicts a U.S. land rig count of about 1,925 by the end of next year, compared with a previous expectation of 2,100 rigs. Currently, there are 1,824 U.S. land rigs.

Bailey predicts the slowdown in rig count growth will mimic 2007, instead of the dramatic stall of 2009 that some are expecting, as expansion in spots like Eagle Ford and the Marcellus shale offset declines in conventional oil drilling.

Also Tuesday, OPEC cut its estimate for world oil demand this year and next. The 12-nation Organization of the Petroleum Exporting Countries said in a report that projected world demand to be up by nearly 1 million barrels a day this year over last. That's 180,000 barrels a day less than its previous estimate. For next year, OPEC says estimated world oil demand growth will fall by a daily 1.2 million barrels to just over 88 million.

THE STOCKS: Bailey reduced his estimates and price targets on Basic Energy Services Inc., Key Energy Services Inc., Nabors Industries Ltd., Pioneer Drilling Co., Patterson-UTI Energy Inc. and Union Drilling Inc. He cut 2012 earnings estimates and price targets by 30 percent to 50 percent.

In morning trading:

-- Basic Energy fell 39 cents, or 2.4 percent, to $15.98.

-- Key Energy declined 6 cents to $10.29.

-- Nabors fell 7 cents to $14.24.

-- Pioneer Drilling fell 18 cents, or 2.1 percent, to $8.31.

-- Patterson-UTI fell 16 cents to $17.96.

-- Union Drilling was unchanged.

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