An unprecedented stability in oil prices will trigger a turnaround in the oil field service industry-particularly contract drilling-says Bob Rose, chairman, president, and CEO of Global Marine Inc., Houston.
At a press conference announcing the yearend-1999 results of the company's summary of current offshore rig economics (SCORE), Rose said, "[The oil industry is] going to see stability for the first timeellipsebecause, for the first time almost in history, [oil] supply and demand are nearly in equilibrium." There is a slight surplus, he said, but any pickup in demand will take up that slack.
Companies are "spending E&P dollars" again, said Rose, and their capital programs will create revenue in the service sector.
"Last year we saw a pick-up in activity; rigs are going back to work."
As the year progresses, the service industry's recovery will accelerate, Rose predicts, as the majors revise their capital spending plans based on new oil price projections.
Yearend SCORE
Global Marine's worldwide SCORE for December 1999 hit 24.9% vs. 24.0% in November. Regional SCOREs for December were: West Africa, 32.7%; Southeast Asia, 27.7%; Gulf of Mexico, 26.6%; and North Sea, 19.6%.
Global Marine's December 1999 SCORE for jack ups was 27.0% vs. 25.2% for November. The SCORE for semisubmersible drilling rigs was essentially even at about 22.5% for both months.
"The worldwide SCORE closed 1999 on a strong note," said Rose. "Improving rig markets in West Africa and the US Gulf of Mexico more than offset continued weakness in the North Sea."
Rose told reporters that the North Sea SCORE is always lower than other regions, because the equipment used there is the most technologically advanced and expensive in the industry due to the area's harsh conditions.
The Gulf of Mexico has been the industry's bright spot for several reasons, says Rose. It is an area of heavy focus for the independent firms, which have been very aggressive. It also contains significant natural gas resources, and gas-based operations helped many operators weather the oil price collapse. In addition, the deepwater region is a heavy draw for the gulf.
Rig demand in the Gulf of Mexico has been very strong, and rigs are moving back into the gulf from other regions. All of the Global Marine rigs that are operating in the gulf have secured work above the cash breakeven point, says Rose.
West Africa and Brazil are the hot spots outside the US, he added. Indicative of West Africa's attractiveness, oil companies have just paid Angolan state firm Sonangol a combined $1 billion in lease bonuses, Rose noted. And activity off Brazil is taking off at last. Incrementally, there could be as many as six rigs moving to Brazil, he predicts.
Petrobras has a bias for dynamically positioned rigs, says Rose, because the firm hasn't laid its flow lines very strategically.
"It's like a spaghetti bowl," he said. As a result, conventional mooring systems, which use anchors, often are not a viable option there.
Oil price stability
For the first time in recent memory, the Organization of Petroleum Exporting Countries is producing almost as much as it is capable of, says Rose, and the excess capacity is in the hands of the very disciplined members. For these reasons, he believes oil prices in the "mid-20s" ($/bbl) are here to stay.
Historically, a price band of $17-21/bbl has been healthy for the industry, says Rose. When oil prices stay in this range, capital expenditures rise, but when they fall below this range, spending declines.
"I suspect that OPEC, to a certain extent, has been testing this band," he added. The appropriate price band may have migrated upward to something more like $20-25/bbl, he said, noting that oil had remained in this band for several months now, and "nothing bad has happened."
On Jan. 14, the price of light sweet crude for February delivery closed at $28.02/bbl on the New York Mercantile Exchange. Rose observed that $28 is probably too high a price.
"I don't think OPEC likes $28/bbl either. If oil continues to spike up, I think OPEC is going to open the valve a little bit," he predicted.
The current global oil market is characterized by increasing demand, stable production levels, and declining inventories. "I think the mid-20s is a sustainable price," Rise concluded.
His confidence in the stability of oil prices translates into an extremely bullish outlook for the service sector in the second half of 2000.
A number of the major oil companies based their 2000 capital budget projections on an oil price of $19/bbl, Rose noted. These budgets will be revised as confidence in the price recovery increases.
Also portending a revival in the service sector, says Rose, is the fact that the consolidation trend has, to a great extent, paralyzed the companies involved in mergers. Majors' capital budgets for 2000 are down 2% compared with last year, while independents' are up 16%.
"This is not at all troubling to me," he said.
"[The majors] haven't been concentrating on drilling holes in the ground; they've been concentrating on [merging and rationalizing assets]," he explained. And, when one company is paralyzed, its partners in various exploration and development projects are also paralyzed. This means that E&D activity is likely to escalate significantly later this year as integration of the merging companies progresses.
Rose also noted that independent firms are very adept at converting cash flow into E&D activity. And those companies will be picking up properties that the merging majors unload in their rationalization schemes.
As a result of these factors, Rose expects a "very aggressive second half 2000."
"I firmly believe we're in a transition year," he said.
