Survey: Rise in drilling activity, price expectations slowing in US, Canada

By OGJ editors

HOUSTON, July 24 -- Oil and gas companies generally expect to increase their upstream spending plans over the next few months, but these increases will likely be more significant outside the US and Canada. Also, pricing expectations within the US and Canada reversed from gains made last month but still remain in "positive territory," said UBS Warburg LLC in its latest monthly PatchWork survey.

UBS's survey is the fifth to be released by the firm since it began polling operating companies earlier this year on their spending plans and price expectations (OGJ, Mar. 25, 2002, p. 7).

The responses given underpin an index pegged to a weighted average ranging from 100 to -100, with the size of a positive value indicating the relative sentiment for an increase in that price or activity, and the converse being true for the negative value, UBS explained.

Drilling activity
UBS found that a majority of operators within the US and Canada plans to increase drilling activity levels in the next 60 days, but that the percentage of those doing so was lower than last month. However, "The 3-month trend remains solidly positive," UBS added. Of all the respondents in the US and Canada, 45% plan to increase drilling activity, 10% to decrease it, and 45% do not plan to alter activity.

Those operators polled about their plans outside the US and Canada, meanwhile, are planning to boost their drilling activities more significantly. Half of these respondents plan the same level of drilling activity, while 37% plan to increase their drilling plans and 13% plan to decrease activity.

Overall, UBS believes that drilling activity—particularly in the US and Canada—should still improve over the next few months. However, the rate of increase may be flattening out relative to the last 2 months.

"The results of this month's survey further validates our belief that the second quarter is the bottom of earnings," UBS noted. "However, the slowing momentum in pricing expectations and the slower rise in activity plans leads us to believe that the second half, although much stronger than current conditions, may not live up to previous expectations."

Pricing
UBS said that, after 3 consecutive months of improvement, product pricing expectations in the US and Canada would appear to be flattening over the next 2 months.

"Pricing expectations in (the US and Canada) reversed last month's sharp gains but still remain in positive territory," UBS said. "Growing uncertainty of an economic rebound and particularly uncertainty regarding natural gas prices are causing customers to remain somewhat guarded," it said.

"International respondents continue to expect an upward trend in oil field service and equipment pricing, with about the same conviction they had last month," UBS noted.

"In (the US and Canada), more respondents expect rig day rates to increase than any other category. Internationally, most respondents expect (logging while drilling and measurement while drilling) and directional drilling prices to rise," UBS said.

Respondents said that they based their budgets on an average oil price of $21.67/bbl and an average natural gas price of $2.90/Mcf. Both price projections, UBS said, are higher than the previous month, which the firm suspects is due to an overall increase in the number of operators from the US and Canada responding to its survey.

Conclusions
"We conclude that, while industry conditions are clearly better than several months ago and should continue to improve from here, there is a bit of caution developing in the customer base," UBS said, adding, "It is possible that this month's results are foreshadowing a second half recovery in North America that at best meets our expectations but does not turn into a runaway recovery."

UBS said, "This month's results still indicate an industry that is in a state of recovery. However, the conviction in the strength and pace of the recovery is somewhat diminished relative to last month's results.

"We believe that, despite sustained higher commodity prices for the past 6 months, many oil companies remain skeptical about the macroeconomic environment, particularly the demand growth for hydrocarbons. As a result, the recovery in drilling and oil field services is proceeding but not in a straight upward sloping line."

With a majority of respondents expecting to increase their levels of drilling activity and spending over the next few months, UBS expects oil field service companies to show higher third quarter earnings and revenues. However, "There are likely to be periods of rapid improvement in the coming months, mixed in with periods of stagnation and consolidation," UBS added.