Service company stock prices await oil and gas firms' 2003 budget announcements


By OGJ editors
HOUSTON, Dec. 3 -- The trading band for service company stock prices has narrowed to 80-90 on the Philadelphia Oil Service Index (OSX) with stiff resistance at 90, which is its 200-day moving average, RBC Capital Markets reported.

"The near-term catalyst, in our opinion, will be 2003 budget announcements by exploration and production companies in early to mid-December," said RBC Capital Markets analyst Kurt Hallead of Austin.

RBC Capital Markets' 12-month price target for the OSX is 105, Hallead said.

"The major impediment to our price target is a substantial weakening of commodity prices, resulting from global supply/demand imbalances that would cut short the cyclical recovery," he said.

Separately, Banc of America Securities LLC analyst James K. Wicklund said US drilling activity continues to see little incremental movement.

"We believe that reductions in consensus earnings forecasts are likely, but the winter weather and the Middle East wildcards may alter the deck. The long-term trend remains positive as natural gas production continues to decline; third quarter 2002 sequential declines are estimated between 1-2%," Wicklund said in a Nov. 27 research note.

Offshore rig markets
Meanwhile, the overall offshore rig markets appear to be fairly stable with the most notable exception being North Sea floaters, Hallead said in a Dec. 2 research note.

"The North Sea jack up market appears to have bottomed. The supply-demand imbalance has come closer into balance due to several jack ups leaving the market throughout the year," he said. "The floater market remains weak, though there are opportunities for short-term work at $35,000-40,000/day, barely above cash break-even. The North Sea floater market is not expected to recover in 2003."

Hallead said E&P companies, both US and Canadian, have indicated their spending will be more focused next year. Specifically, recent capital expenditure announcements have confirmed a spending trend concentrating on Canadian and deep shelf Gulf of Mexico gas plays, he said.

Gulf of Mexico
Meanwhile, the Gulf of Mexico jack up market is showing some modest pricing pressure with the exception of rigs drilling deep gas wells, Hallead said.

"The most likely scenario is an upturn in early 2003," he said. "Premium jack ups are achieving near full-utilization, likely due to the incremental demand for jack ups capable of drilling efficiently in the deep shelf (15,000 ft and deeper)."

He believes the Gulf of Mexico deep shelf activity offers significant opportunities to replenish declining US natural gas supplies. The limited number of jack ups capable of drilling efficiently in the deep shelf is commanding premium day rates in the $5,000 range, he said.

Latin America
"Pemex is rumored to be tendering for an additional 15 to 18 rigs during 2003. The bid package is expected out in February 2003, with start dates ranging from June through September," Hallead said of Petroleos Mexicanos.

Seven of the rigs are expected to be floaters, he said, adding that any floaters pulled from the (US) Gulf of Mexico will be a positive.

"Having drawn approximately 22 rigs out of the (US) Gulf of Mexico in 2002, Pemex should continue to ramp up activity in order to increase Mexico's productive capacity. In addition, Brazil will also be out for moored equipment in 2003, though we believe this is more of a (second half 2003) event," Hallead said.

West Africa
The West Africa floater market in 2003 is expected to be flat with 2002, he said. Early termination of two jack ups working off Nigeria has caused some concern recently.

The Nigerian National Petroleum Corp. (NNPC) has fallen behind on payments to its joint venture partners so some drilling programs have been delayed.

"However, we believe this is only a temporary problem, and once NNPC catches up, programs will restart," Hallead said. Meanwhile, drilling contractors say other short-term opportunities are available up and down the west coast of Africa.

Middle East
"India holds the most potential in the region, possibly requiring an incremental eight rigs in the market," Hallead said.

The state-owned Oil and Natural Gas Corp. recently tendered for three ultradeepwater semisubmersibles and could potentially acquire 4 or 5 jack ups during 2003, he said.

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