Upbeat industry outlook evident at OTC

Sam Fletcher
Senior Writer

HOUSTON, May 9 -- The 51,000 people who attended the annual Offshore Technology Conference in Houston on May 2-5—the biggest turnout since 1985—should be good news for crude market prices this year, said analysts in the Houston office of Raymond James & Associates.

"Historically, OTC attendance has tracked fairly closely with the price of oil," said analyst J. Marshall Adkins in a May 9 report. "This correlation has been remarkably good for nearly 30 years until this year." Prices have escalated sharply over the last couple of years, spiking above $50/bbl this year, while OTC attendance has shown more-gradual growth, although well above the 39,00-plus attendees it averaged over the previous 15 years.

Additionally, the number of exhibiting companies at the conference—2,087—"was near the highest level since 1985, indicating strong interest in the field," Adkins said. Still, he said, "It was evident that consolidation among the service companies has clearly reduced the number of medium-sized, technology-oriented oil service companies. This trend was especially apparent in the rig manufacturing area, where substantial market consolidation has occurred over the past several years."

Overall, Adkins said the turnout of exhibitors and attendees at this year's OTC was "evidence of the view of most in the oil patch that activity levels will continue to move higher over the next several quarters."

Like many others who attended the recent OTC, Adkins saw "a continuation of the technology evolution in progress, with very few (if any) new revolutionary designs." He said, "While we witnessed several new product unveilings at this year's show, we also saw many of the same gadgets and gizmos that have been around in the past couple of conferences."

Efficiency emphasized
"The common theme we took away from this year's OTC was the continued evolution of drilling technology, leading to increased efficiency in nearly all aspects of drilling. This includes everything from lower mechanical failure rates, significantly reduced drilling times through increased hydraulic horsepower, and better drillbit technology, and improved time and cost savings during rig moves," he said.

"It appears as if some of these technologies have begun to make a dramatic difference just over the past couple of years," Adkins said. "For example, we heard numerous stories about how increased hydraulic horsepower combined with better bit technology and fluid dynamics continues to significantly improve drilling times."

Despite an industry-wide trend toward drilling deeper and more difficult wells, improved drilling technology has increased the total footage drilled per rig per year. "The average footage drilled per rig has increased 12% over the past 5 years," said Adkins. "While the general footage trends are moving even higher, a Land Rig Newsletter analysis of the 75 most active rigs found that total footage drilled is increasing faster, up 10% [from the previous year] in 2004 and up 100% from a few years ago."

He said, "Clearly, advances in drilling have proved a benefit to both contractors and operators, as contractors are able to charge higher day rates for better technology, and operators are willing to pay higher day rates to more quickly and efficiently monetize their prospects."

Slow to adopt
Nonetheless, Adkins warned, "Investors should realize that the oil patch is notoriously slow at adopting new technologies. For example, National Oilwell Inc. [now the newly merged National Oilwell Varco Inc.] introduced the Hexpump at the OTC conference 4 years ago, but sales really began taking off only last year. While advancing technologies will drive superior long-term performance, most of the new technologies highlighted at the OTC will have little meaningful earnings impact . . . over the next year."

He added, "Some of the potentially 'revolutionary' technologies, such as electric subsea trees, intelligent drill pipe, fiber optic sensors, casing drilling, and expandable tubulars, will likely take years before they are commonplace in the oil field."

Prices rebound
While industry leaders were sharing technology and optimism at OTC, energy prices rebounded in world markets on concerns that refiners may not be able to meet rising product demand in the second half of this year. "This view was bolstered late in the week by better-than-anticipated US employment data, which indicated a strengthening US economy and thus was bullish for demand," said Robert S. Morris, Banc of America Securities, New York, in a May 8 report.

After declining by 8.6% the previous week, spot market prices for West Texas Intermediate bounced back from a 2-month low early in the week of OTC. In New York on May 6, the June crude futures contract climbed above $52/bbl before settling at $50.96/bbl.

(Online May 9, 2005; author's e-mail: samf@ogjonline.com)

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