Sector Snap: Drillers down, but analyst bullish

The Philadelphia Oil Service Sector Index, a basket of rig operators and other oilfield service providers, sank 1.6 percent to 327.12 in early afternoon trading. The broader market advanced, with the Dow Jones industrial average up 0.8 percent to 12,852.70.

Oil prices spiked before giving up some of last week's sharp gains. Light, sweet crude for June delivery jumped to a new record of $126.40 a barrel on the New York Mercantile Exchange but then fell back to $125.35, down 61 cents. The contract first rose above $126 on Friday.

The pullback pressured drilling stocks. Market leader Transocean Inc. fell $3.30, or 2.2 percent, to $150.36, while Noble Corp. lost 85 cents to $61.73.

The companies are among those that investment bank Dahlman Rose said it expects to benefit from an uptick in drilling rates in the coming years.

National oil companies have been locking in drilling contracts in recent months while most publicly traded oil majors "have been waiting on the sidelines," analyst Omar Nokta wrote in a client note."Now, with limited availability and record high leading edge rates, they must combat declining reserves and production to satisfy stakeholder demands."

Nokta and colleagues boosted their forecasts for average drilling rates by $50,000 per day, meaning that they now expect the priciest ships, which can operate in very deep water under harsh conditions, will fetch an average of $600,000 per day over the next three years.

"We believe Transocean (RIG) stands to benefit the most from the tight deepwater market as it controls seven of the 16 ultra deepwater rigs available to market through the end 2010," Nokta wrote. "We expect the company to negotiate attractive contract terms that allow for substantial visibility deep into the next decade."

In addition to Transocean and Noble, Nokta named Pride International Inc. and Atwood Oceanics Inc. as U.S.-based companies that should benefit from higher drilling fees. He rates all four companies "Buy."

Pride shares rose to an all-time high of $44.81 before retreating, losing 18 cents at $44.28. Atwood fell $2.49, or 2.4 percent, to $102.40.