By OGJ editors
HOUSTON, May 6 -- The Gulf of Mexico oil service sector is experiencing the signs of an upturn, analysts with Simmons & Co. International, UBS Warburg LLC, and RBC Dain Rauscher Inc. all noted in recent reports.
"It is reasonable to expect that the premium Gulf of Mexico jack up rigs [capable of drilling in water depths greater than 250 ft] are on the verge of meaningful day rate increases. This, in turn, should provide a catalyst to eventually pull up day rates of the lower-end GOM jack ups," the Houston-based investment banking house Simmons & Co. said.
Kurt Hallead, an Austin analyst with RBC Dain Rauscher, agreed that Gulf of Mexico rig utilization and day rate pricing are rising because of higher natural gas prices, improved drilling economics, and increased exploration and production spending.
"For 2002, we foresee 350 ft jack ups rising by 9% to $36,000/day from $33,000/day, 300 ft up by 12.5% to $27,000 from $24,000, and 250 ft increasing by 16% to $22,000 from $19,000," Hallead said of Gulf of Mexico jack up day rates.
"For 2003, we foresee 350 ft jack ups rising by 15% to $45,000/day from $39,000/day, 300 ft up by 23% to $38,000 from $31,000, and 250 ft increasing by 8% to $27,000 from $25,000, Hallead said of a recently revised RBC Dain Rauscher forecast.
UBS Warburg analyst James Stone of New York said his firm's third edition of its monthly Patchwork Survey "indicates an upturn is around the corner. North American operators are finally responding to commodity price signals and preparing to increase spending and activity levels."
The survey compiles responses from oil and gas operating personnel, who are polled monthly as to their expectations of price and activity level (OGJ, Apr. 15, 2002, p. 7).
Signs of improvement
Jack up rig utilization bottomed in mid-December and has been steadily rising as a result of greater drilling activity and the migration of rigs out of the Gulf of Mexico to other markets, Simmons said.
The number of contracted jack ups has increased from 76 for the week ended Dec. 14, 2001, to 94 for the week ended Apr. 12.
Total rig utilization has been flat year-to-date, with jack up activity increasing while floater activity decreased. Overall Gulf of Mexico rig utilization has been at 59-62% since late last year.
Meanwhile, overall Gulf of Mexico jack up utilization "has masked the significant activity of the premium-end jack ups," Simmons & Co. said. Jack up utilization rose from 51% for the week ended Dec. 14 to 65% for the week ended Apr. 12.
This included a sharp increase in the utilization of premium jack ups, which comprise 35% of the total Gulf of Mexico jack up market.
Growing demand for deep natural gas drilling is driving drilling activity in the Gulf of Mexico, Simmons said. Jack ups that can drill in 350 ft of water have experienced the most substantial revival so far, the firm's analysts said.
Current utilization of the premium jack up fleet is 94%. "Historically, this is a utilization level that supports day rate increases," they said, noting recent contracts in which premium jack ups brought day rates of up to $5,000 higher than previous contracts.
Lower-end jack up day rates
"The near-term day rate direction for the lower-end jack up rigs is less certain," Simmons & Co. said. "Current utilization is well short of the 85-90% mark associated with improved pricing power."
Consolidation within the industry sector also is likely to have an impact. Transocean Sedco Forex Inc. and Pride International Inc., both of Houston, own a combined 52% of the lower-end jack ups and hold 75% of the current idled jack up capacity, Simmons noted.
The fundamentals of the oil service cycle are experiencing subtle changes, Simmons concluded. "However, the turn and the ride up will likely not be a smooth one, as pockets of activity softness can occur from time to time?We remain optimistic on the industry up-cycle that lies ahead," the firm's analysts said.
Oil, gas price expectations
The May 3 PatchWork Survey showed survey respondents' budgets are based on an average oil price of $20.65/bbl and an average natural gas price of $2.70/Mcf. In response to commodity price signals, operators are preparing to increase exploration and production spending.
"Only 4% of North American operators plan to reduce spending in the next 60 days, while 53% plan no change, and 43% plan an increase," Stone said.
"In North America, drilling activity expectations are turning up for the first time, reversing last month's data; 48% of respondents planned to increase drilling, 8% planned to decrease, and 44% did not plan any changes," he said.