By OGJ editors
HOUSTON, Sept. 8 -- Rig manufacturers face dim prospects for equipment orders until mid-2004 because rig counts remain well below levels to drive profitable newbuilds, said Smith Barney, a unit of Citigroup Global Markets Inc., Wilmington, Del.
Offshore rig utilization has fallen to 80% compared with 90% utilization in mid 2001. Meanwhile floating rigs such as semisubmersibles and drillships, have experienced an even greater utilization decline, falling to 73% from 88%.
"In our view, a new wave of construction activity is unlikely until these percentages again approach 90% as current day rates are well below replacement cost levels. Moreover, the US land rig market recently completed a major expansion phase," analyst Geoff Kieburtz said in a Sept. 8 research note.
He forecast that it will be 9-12 months before offshore rig counts and construction economics improve to the point where drilling contractors will consider newbuild projects, particularly for deep water.
But, oilfield equipment suppliers are expected to report increased earnings during 2004 given aftermarket activity, nontraditional markets, and land rig enhancements, Kieburtz said.
Land rig outlook
Contrary to offshore rig counts, land rig counts in both the US and international markets have trended up, he said.
"Capital equipment revenue generation from land rig projects is substantially lower than that of those offshore. However, strong onshore rig counts can provide a stable level of aftermarket activity, preventing revenues from declining steeply in the absence of newbuild offshore projects," Kieburtz said.
The US land market competed a significant newbuild phase during the 2000-01 drilling boom, and an estimated 250 onshore rigs were either built or upgraded.
Although 2004 land driller spending is projected to be modest, Smith Barney still forecast rising land drilling capital expenditures during that year given an anticipated continuation of a climbing land rig count.
Other markets
International markets are expected to provide opportunities for newbuild and upgrade orders.
"The largest growth potential, in our view, resides in the Middle East and Chinese markets, although the timing and scope of new rig projects is difficult to ascertain," said Kieburtz.
He said several Middle Eastern nations, particularly Kuwait and the UAE, could order new rigs during in 12-18 months for land or shallow offshore drilling for oil.
Although Saudi Arabia and other nations also have indicated plans to increase their commitment to natural gas drilling, Kieburtz said he does not believe significant growth is likely in the natural gas arena for "at least 2-3 years."