S&P sees strong year for US drilling contractors

March 24, 2006
US drilling contractors will have higher day rates and greater pricing leverage for service costs this year compared with last year, Standard & Poor's Ratings Services said in a Mar. 24 report.

By OGJ editors
HOUSTON, Mar. 24 -- US drilling contractors will have higher day rates and greater pricing leverage for service costs this year compared with last year, Standard & Poor's Ratings Services said in a Mar. 24 report.

"Many oil field services and drilling companies had solid cash flow generation in 2005, particularly during the second half of the year," said S&P analyst Brian Janiak of New York.

He foresees continued trends "that should lead to stronger cash flow generation for many of the oil field services and drillers in 2006. . .especially if oil and gas prices remain above $45/boe and $6 Mcf [of gas] equivalent."

In the last 6 months, drilling contractors reported rapid extension of contract durations and increasing day rates for midwater floating rigs. All product lines and geographic markets have backlogs.

"In particular, drilling bits, logging, directional drilling, wellhead equipment, drilling components, and aftermarket services have shown significant strength," Janiak said.

For the longer term, he expressed concern about the increasing number of jack up rigs planned and currently under construction.

"To date, S&P is aware of 51 new jack up rigs under construction at an average cost of $130 million and 17 semisubmersibles and 2 drillships at average costs of $450 million and $600 million, respectively," Janiak said.

S&P views near-term fundamentals to be favorable, but it continues to monitor drilling contractors' "more aggressive financial policies and growth incentives in the intermediate term" as new jack ups and semisubmersibles enter the market during 2007-08.