US drilling increases as industry mulls changes at Anadarko

By OGJ editors

HOUSTON, Aug. 1 -- US drilling activity continued its slow climb, adding 6 more rotary rigs this week for a total of 1,097 units working, up from 848 a year ago.

However, Anadarko Petroleum Corp.'s announcement Thursday that it is eliminating 400 jobs and closing offices in Amarillo and Midland, Tex., in order to cut its annual costs by $100 million rattled the oil service industry, sparking speculation that the company that recently was the most active in US drilling might release as many as 44 rigs from its proposed drilling programs (OGJ Online, July 31, 2003).

Anadarko's response
"We did drop seven land rigs this week because, as we've said before, our drilling budget was front-loaded," an Anadarko representative told OGJ Online on Friday. "That's the nature of our business. We were down to 25 rigs at the end of last year before going back up to 66." The company has already spent $1.5 billion of its current worldwide capital budget of $2.5 billion, she said.

Anadarko's US land drilling "is easy to turn on or off," she said. "It's primarily on land that we own or control." Meanwhile, she said, Anadarko's international and Gulf of Mexico drilling programs "are not affected," while the company plans to double the number of rigs it has working in Canada "to about 15" by the end of this year.

Still, a much smaller East Texas independent producer told OGJ Online, "Rumors are flying, as rumors usually do, that even $5/Mcf gas isn't enough to keep domestic drillers busy. I received a call yesterday from a local drill(ing) contractor; he was attempting to keep numerous rigs working (that were) just let go by a large domestic producer.

"Some evidence also exists with the numerous layoffs and forced retirements on many personnel in our domestic producing ranks. Is it because the natural gas commodity futures are being viewed as going too soft, now causing many a domestic producing company to prepare today for an expected downturn in our domestic production earnings?" he wondered. "The proof will be in the domestic onshore rig count. If it begins to drop, and soon, then we may expect to see a firming natural gas price. Otherwise, we may have drilled into that ominous surplus once coined 'the bubble.'"

However, James K. Wicklund, an oil services analyst in the Houston office of Banc of America Securities LLC, said, "We do not think this is the beginning of a trend, but rather one company that got way off track. Generally, more companies are announcing increases in drilling budgets."

Moreover, he said, "One point has been ignored. Anadarko was listed as the most active oil company in the US with about 50 rigs running just a few weeks ago. That gives Anadarko about 4% of the market. If the most active company has only 4% of the capacity, then the breadth and depth of the active drillers is dramatic."

Nevertheless, said Wicklund, "No business can go through an unexpected, unbudgeted, unplanned 30% increase in business in 6 months and not need to slow down and consolidate gains." He said, "The US drilling rig count will stall and maybe even drop some. It will pick up again in the December quarter as budgets are wound out and the partnerships drill up intangible write-offs to shelter a very good year of income."

Wicklund expects the US rig count through this year to be up by 27-29% from 2002. "Drilling will increase again next year as continuing high natural gas prices continue to drive more drilling in order to bring supply (and) demand into better balance than just for a single storage season," he said.

Takeover speculated
Like most companies in the industry, Anadarko refused to comment on reports by news media and analysts that it may be in touch with several potential buyers, including the Royal Dutch/Shell Group, ENI SPA of Italy, ExxonMobil Corp., and BP PLC.

However, the company "has made several curious moves in the last week" that is "fueling the takeover speculation," said William Featherstone, executive director of oil and gas exploration research at UBS Investment Research, UBS Warburg LLC, New York.

"We have been fielding numerous client inquires with regards to the potential sale of Anadarko, given the stock's underperformance over the last 2 years and the recent return of 65-year-old Bob Allison to the position of CEO," said Featherstone in an evaluation of the company issued Thursday. "Four of the top seven corporate officers have 'resigned' in the last month, leaving a hole in the management team and presumably 'cleaning up' the cost structure."

He said, "We believe the most likely buyer, given (Anadarko's) size, would be a major oil company." However, Anadarko's "anemic growth profile" in the last few years "would not likely bolster an acquirer's production profile," said Featherstone. Besides, he said, the majors are targeting a return on average capital employed "well above" Anadarko's estimated 8.5% ROACE for 2004.

US rig count
The small increase in drilling activity this week was reflected in all three primary sectors, said officials Friday at Baker Hughes Inc. The number of rigs drilling offshore increased by 3 to 107 in the Gulf of Mexico and 111 for the US as a whole. The number of land rigs working rose by 2 to 969, and inland waters operations are up by 1 rig to 17.

Drilling activity in Canada dipped by 8 rigs to 416, still well above the 257 units that were working during this same period in 2002.

The number of rigs drilling for natural gas in the US increased by 7 to 937, while oil drilling retreated by 2 rigs to 156. There are 4 rigs unclassified. There are 288 rotary rigs involved in directional drilling, 11 more than last week. However, horizontal drilling is down 1 unit to 95.

Rig counts in Texas and Wyoming increased by 4 each to 475 and 65, respectively, this week Oklahoma and New Mexico each added 1 rig for respective totals of 140 and 61. Louisiana's rig count dipped by 1 to 158. Unchanged were California at 22 and Alaska at 8.

The number of mobile offshore rigs under contract in the Gulf of Mexico increased by 1 to 129 this week, while the number of rigs available for work also is up 1 to 174, for an utilization rate of 74.1%, said officials Friday at ODS-Petrodata, Houston.

In European waters, the number of contracted wells jumped by 3 to 84 out of the 100 available, putting utilization at 84%. Worldwide, there was a net gain of 2 rigs to 525 under contract out of a total fleet of 653. Global utilization among mobile offshore rigs was 80.4%.

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