DRILLING MARKET FOCUS: Companies report positive first-quarter 2007 results

May 28, 2007
Drillers and drilling service companies continue to build new land and offshore rigs, although yards are full and there is some softening in the North American land rig market.

Drillers and drilling service companies continue to build new land and offshore rigs, although yards are full and there is some softening in the North American land rig market. This picture emerged from analysts’ review of companies following conferences and quarterly reports.

Operators and service companies spoke at the Independent Petroleum Association of America’s (IPAA) 11th annual Oil & Gas Investment Symposia (OGIS) in New York in April.

Parker Drilling Co. Chairman, President, and CEO Robert Parker Jr. said the company’s revenue has been evenly split between domestic and international and that US revenue increased 49% in 2006 over the previous year. He expects international business to increase in 2007. The company has 34 drilling rigs and 19 barge rigs operating in 15 countries and also operates 8 other rigs under operation and maintenance contracts.

Parker said the company had $195 million in capital expenses in 2006, including $72 million to build four, 2,000-hp land rigs; $29 million to build the 77B ultradeep drill barge; $8 million to convert workover barge 12B to a deep drilling barge; and $50 million to expand Quail Tools to six locations in the US.

Dave Mannon, Parker Drilling senior vice-president and chief operating officer, said the company is benefiting from increased margins on contract turnovers for six international rigs, which are all moving to 3-year contracts in southern Mexico, Libya, and Kazakhstan. Parker also has rigs in Colombia, Algeria, Kuwait, Saudi Arabia, Bangladesh, Turkmenistan, Sakhalin, Papua New Guinea, Indonesia, and New Zealand.

Parker Drilling is also benefiting from the 17 barges it operates in the US. Mannon said that barge-rig day rates have risen dramatically in the Gulf of Mexico in the last 4 years. In 2003, intermediate-depth barges leased at about $13,000/day, and the current average is $38,600/day (197% increase). Deeper drilling barges that leased at $17,700/day in 2003 are now averaging $52,900/day, up 199%.

Mannon discussed the company’s 2006-07 front end engineering and design (FEED) contract to design a unique rig for BP Alaska’s Liberty project in which BP authorized Parker to procure long lead items. Mannon told OGJ that BP will sanction the full scale project in 2008, which will provide Parker the opportunity to begin detailed design and construction.

Parker and Mannon reiterated reports that the company set an extended-reach drilling record from the Yastreb rig in Sakhalin I, reaching 37,016 ft laterally in the Z-11 well (OGJ, May 7, 2007, p. 9).

Offshore drillers

There are 126 offshore rigs under construction, including 14 drillships, 38 semisubmersibles, 67 jack ups, 3 drilling tenders, 3 inland barges, and 1 platform rig (Table 1).

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All of the drillships are being built in South Korea, with the exception of MPF Corp. Ltd., which is building one in Spain.

Transocean Inc., Stena Drilling (a wholly owned subsidiary of Stena AB), and Pacific Drilling Ltd. are building three drillships each; Petrobras-Mitsui (PNBV) and SeaDrill Ltd. are building two each.

Among the semisubs, 15 are under construction in Singapore, 8 in China, 7 in South Korea, 4 in UAE, 2 in Russia, and 1 each in Norway and Iran (Caspian).

Most of the jack ups (40) are being built in Southeast Asia. Another 11 are in the US Gulf of Mexico; 7 in the Persian Gulf, 5 in China, 3 in India, and 1 in Russia.

SeaDrill is building two drilling tenders in Malaysia (one for Varia Perdana), and Saipem is building its TAD-1 drilling tender in the Congo.

Inland Bay Energy Services is building three inland barges for the Gulf of Mexico.

Nabors Offshore is building one platform rig (Super Sundowner XX).

Several drillers issued first-quarter 2007 reports in April.

ENSCO International operates 46 offshore rigs worldwide. The company’s strategy is to continue to expand into the international deepwater market. This accounted for 57% of gross income in 2006 and analysts project 75% of gross income in 2007.

Lehman Bros. Sr. Vice-Pres. Angeline Sedita said ENSCO may move two or three additional rigs out of the Gulf of Mexico this year. The company has three high-specification deepwater rigs under construction and Sedita thinks it is likely to continue to expand its deepwater fleet through additional new construction.

Transocean updated its fleet contract status on May 1.

SCORE

GlobalSantaFe Corp. reported that the worldwide SCORE, or Summary of Current Offshore Rig Economics, for March 2007 increased 4% to 138.2 from the previous month’s 132.9.

The SCORE for the Gulf of Mexico was 110.5 and showed the greatest regional increase, 7.7%, over the previous month, but only 3.5% over the previous year. The SCORE for West Africa was 142.3; it increased 5.4% and 33.3% over the previous month and year, respectively.

The Southeast Asia SCORE increased 2.1% over the last month to 127, up 55.5% over the past year; this region has shown the most dramatic regional increase in profitability. The North Sea SCORE was 152.4 in March; it increased only 0.3% from the prior month, and 16.5% over the prior year.

Semisubmersibles have been increasing in profitability over jack up rigs since mid-2006. The semisub SCORE was 156.4 in March, up 7.1% and 32.8% from the prior month and prior year, respectively. The jack up SCORE was 126.3 in March, up 0.8% for the month and 9.5% over the year.

GlobalSantaFe’s SCORE compares the profitability of current mobile offshore drilling-rig day rates to the profitability at the 1980-81 peak of the offshore drilling cycle. In 1980-81, when SCORE averaged 100%, new contract day rates equaled the sum of daily cash operating costs plus about $700/day/$1 million invested.

Land drillers

Lehman Bros.’ Sedita believes the US land drilling business will continue to soften near-term and new rig construction adds additional risk. She expects more than 200 new land rigs to be delivered in the US this year, all under term contracts. The continued importation of LNG also affects natural gas drilling.

Sedita expects the US natural gas drilling market to bottom mid-year and begin to improve slowly later in the year or by early 2008. Sedita said that the US land drilling market is cyclical and driven by natural gas prices, therefore not as strong as the international and deepwater drilling markets.

Day rates are softening for specific rig classes. In the US, Sedita sees continued weak demand for lower-specification rigs (low horsepower rigs, mechanical rigs) as well as the very high (2,000-3,000 hp) rigs. She said the core market for 1,000-1,500 hp land rigs, however, has been surprisingly strong in both demand and day rates. Lehman Bros. expects continued high demand for 1,000-1,500 hp rigs as these rigs are utilized in core areas of US drilling and unconventional gas plays.

In Canada, Sedita sees the land-drilling market as extremely weak and expects continued low activity on a year-over-year basis. This has spurred some movement of Canadian rigs into the US market, but Sedita notes that “many of the Canadian rigs are not suitable for US drilling due to their smaller size...for use in shallow wells” [supersingles].

She added that the “inherent sharp decline curves of the US and Canadian [gas] markets, coupled with lower drilling activity, will help to support today’s higher prices.”

Nabors Industries is the world’s leading contract land driller, with about 600 land drilling rigs, 780 land workover and well service rigs, and 65 offshore platform rigs. Nabors will take possession of 58 newbuild rigs in 2007 and has 45 more under construction, all with firm term contracts at high-margin day rates.

Nabors’s size and diversification give it a better economic outlook than its peers, said Sedita, while the industry waits for a gradual land-rig market recovery later this year.

Patterson-UTI Energy Inc. is the second-largest contract driller in North America, with 403 land rigs. Sedita said PTEN’s land rig fleet is likely to lose market share to companies with newer fleets and fewer mechanical rigs. She also noted that Patterson-UTI has a less-aggressive construction program for new land rigs, which may depress 2007 estimated earnings, relative to companies that are building new rigs.

Construction

Lehman Bros. characterizes this as “the first significant newbuild cycle during the past 25 years...[encompassing] all major geographic regions and...every asset class-land rigs, jack ups, and floaters.”

In early May, Lehman Bros. oil service and drilling analysts Jim Crandell and Lisa Hackman noted National Oilwell Varco’s “commanding market share” in land and offshore rig construction. They believe NOV’s businesses will benefit in the “robust worldwide drilling markets” because of expanding demand for capital equipment.

NOV’s rig technology group manufactures drilling rigs, rig equipment packages, coiled-tubing units, cranes, mooring systems, wireline units, nitrogen-injection units, and workover rigs. The group recently acquired Rolligan, a manufacturer of completion and service equipment such as frac units, blenders, data-acquisition systems, and coiled-tubing support units.

NOV’s revenue from rig technology increased 7% to $1.22 billion in first-quarter 2007 from $1.137 billion in the prior quarter. Although new orders for capital equipment fell 14% to $1.2 billion from $1.4 billion in the prior quarter, NOV’s backlog for rig equipment increased to $6.4 billion from $6.0 billion. And following the end of the quarter, NOV booked a $238 million drillship order.

NOV’s backlog for land rig drilling equipment, however, dropped 33% to $1.2 billion from $1.8 billion in the prior quarter; it represented 18% of total backlog (down from 30% in the prior quarter). The company said that the demand for land-rig equipment weakened in North America but showed gains internationally during the quarter.

Meanwhile, NOV’s offshore backlog increased 24% to $5.2 billion from $4.2 billion in the prior quarter. Of the current total backlog, the company expects to deliver about $2.5 billion in 2007, $2.1 billion in 2008, and the $1.7 billion balance thereafter-supporting Crandell and Hackman’s belief that demand remains strong for drilling equipment, particularly offshore.

NOV’s Petroleum Services and Supplies group provides consumable oilfield product such as transfer pumps, solids-control systems, drilling motors and other downhole tools, and rig instrumentation systems. The group’s revenue increased 3% to $692 million in first-quarter 2007 from $670 million in the prior quarter.

Demand is strong in North America and internationally, although NOV saw declining revenue from Latin America. Low costs of some raw materials (nickel, copper, bronze) improved margins, but the company expects those costs to increase during second-quarter 2007.

NOV’s Distribution Services group provides maintenance, repair, and operating supplies to drilling and production operations. Group revenue fell 5% in first quarter to $352 million from $371 million, largely due to reduced activity in Canada. This overshadowed gains in the US (Rockies, Gulf Coast) and internationally (North Sea, Saudi Arabia).

Cameron International’s drilling and production systems group provides surface and subsea equipment. Cameron’s surface orders were up 22% year-over-year, driven by Eastern Europe. Subsea orders were down 5% year-over-year, but order activity picked up in second quarter. In April, Petrobras awarded Cameron a $127 million contract to provide 22 subsea trees and the related control systems.

Lehman Bros.’ Crandell and Hackman expect orders for 600 subsea trees in 2007, mostly for Africa (61%) and the Gulf of Mexico (20%). Cameron has about 30% market share for subsea trees, along with FMC (40%), Vetco-Gray (15-20%), Aker-Kvaerner (7-10%), and DrilQuip (less than 8%).

Cameron’s drilling equipment orders fell 29% during first quarter and 47% year-over-year to about $200 million as offshore rig orders declined.

Future markets

At the OGIS conference in New York, Parker COO Mannon said, “Majors, super independents, and national oil companies are looking for large fields to develop. A lot are in frontier markets that demand rigs to drill deeper, more directional, and often employ extended reach technology.”

He said a lot of the fields are in desert, arctic, and other environmentally sensitive areas. Shortages of personnel are a continuing problem, but Parker [and other companies] offer in-house crew training. HSE performance is often a critical performance variable, used as a measure to prequalify contractors and make purchasing decisions.