Simmons & Co. lowers 2002-03 rig count forecast for US, Canada

Simmons & Co. International has reduced its second half 2002 and 2003 rig count forecast for the US and Canada along with its oil service companies' earnings estimates.

By OGJ editors

HOUSTON, Sept. 17 -- Simmons & Co. International has reduced its second half 2002 and 2003 rig count forecast for the US and Canada along with its oil service companies' earnings estimates.

Yet, the Houston-based investment banker still expects the large and midsized capitalization oil service companies that it follows to report year-on-year earnings/share growth of 33% next year.

"Our decreased expectations can be attributed to: heightened concerns among the (exploration and production) companies that 'full storage' will continue to depress natural gas prices through the balance of this year, and an overall sense of uncertainty characterizing the prospects of the economy and the subsequent impact on oil and gas demand," oil service analysts Scott Gill and Bill Herbert reported in a research note.

In the US, exploration and production companies have slowed the pace of capital expenditures, which also slows oil service activity and pricing momentum. "Thus, we feel the cycle has been 'pushed to the right' by several months," the analysts said.

Meanwhile, a drilling activity slowdown affecting the UK North Sea is more severe than previously believed although Simmons & Co. still projects a recovery beginning in mid-2003.

Revised rig count forecasts
"Our outlook assumes that the recovery in (US and Canada) drilling activity is pushed out 6 months and resumes a gradual recover in early 2003," Gill said.

For the US and Canada, Simmons & Co. adjusted its average second half 2002 rig count assumptions downward by 6% and lowered its average 2003 rig count assumptions by 9%. For all of 2002, the firm projects 821 rigs in the US, which would mark a YOY decrease of 28%, and 262 rigs in Canada, which would mark a YOY decrease of 23%.

US drilling activity increased for the week of Sept. 13 with 863 rotary rigs working, up 12 from the previous week for the largest rig count since Jan. 18 and the third largest weekly tally this year (OGJ Online, Sept. 13, 2002).

Gill said he expects rig numbers will bounce between 840 and 860 for the next few weeks. He still expects a third quarter average of 850 rigs in the US, which would mark a YOY decline of 32%.

Regarding the rig count outside the US and Canada, Simmons & Co. has lowered its assumptions by 2% for second half 2002 and lowered its previous 2003 assumption by 4% primarily due to the weaker-than-expected outlook for the UK North Sea. For all of 2003, the firm projects 726 rigs outside the US and Canada, which would mark a YOY decrease of 3%. Worldwide, Simmons & Co. projects 1,819 rigs for 2002, which would mark a YOY decrease of 19%.

EPS revisions
Simmons & Co. has reduced its earnings/share (EPS) projections for large and midsized capitalization service companies, land contract drillers, and offshore drillers.

"For these 21 companies, on average, we are reducing our second half 2002 earnings estimates by 11% and 2003 estimates by 31%, respectively. The largest revision is associated with the land contract drilling sector, and the slightest adjustment is associated with the large cap service stocks," the analysts said.

Since the report was issued, Gill noted that third quarter EPS have been "marginally lower" than Simmons & Co. had predicted.

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