OUTLOOK The improving economic scene, both here in the U.S. as well as worldwide, is the main driver of the current oil rally that has seen the commodity settling around the $80 per barrel level. But high levels of product inventories (particularly gasoline), along with still higher supplies, will limit any sustained crude gains, in our view. But way too many factors weigh on oil prices, from OPEC decisions and geostrategic tensions to the value of the U.S. dollar and seasonal variables, to definitively size up each one of them for their respective impact on prices.  In its latest release, the Energy Information Administration (EIA) reported a less-than-anticipated increase in crude stockpiles, which rose by 800,000 barrels for the week ending October 23. However, current crude oil stocks, at 339.9 million barrels, still remain 9% above the year-earlier level as well as above the upper limit ...

According to data from Baker Hughes Inc. (BHI), the number of rigs searching for oil and gas in the U.S. rose for the week ended Oct. 9, reflecting ramped up drilling activity by the producers amid recent optimism about commodity price recovery. As shown in the first chart below from Baker Hughes, rigs exploring and producing in the U.S. totaled 1,041 during the week. This is up by 17 from the previous week’s tally and is 19% higher from the 2009 low of 876 (set in the week ended June 12). The combined oil and gas rig count is down by 949 from the year-ago period. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ended Aug. 29 and Sept. 12. The number of natural gas rigs drilling in the U.S. increased by 14 to 726, ...

We are upgrading Smith International, Inc. (SII) shares to Buy from Hold following the stock’s recent weakness, which has made valuation very compelling, in our view. The recent completion of the W-H Energy acquisition provides Smith with entry into new product lines with favorable growth prospects, particularly internationally.

Looking ahead, we expect the company to generate strong revenue growth and margin expansion, aided by demand acceleration, price increases and cost discipline. We have raised our EPS estimates (2008: $3.87 vs. $3.78; 2009: $4.90 vs. $4.69) and kept our price objective unchanged. Our price objective remains unchanged.

Performance of oilfield service companies, including Smith International, is closely tied to capital expenditures by oil and gas companies on exploration and production (E&P) activities. Peak cycle commodity prices have significantly strengthened producers’ cash flows and balance sheets, enabling producers to ramp up their E&P spending gradually, particularly in the offshore markets.

Smith remains committed

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