Global Marine: Independents driving rig utilization rise
The rise in oil and natural gas prices that hoisted jack up rig demand in the second quarter also drove revenues higher for Houston-based drilling contractor Global Marine Inc. Large independent exploration and production companies have generated much of the increased jack up demand, says Global Marine Chairman Bob Rose. But major oil companies will have to step up their spending before a rebound can occur in second and third-generation semisubmersible rig markets such as the North Sea.
HOUSTON�The rise in oil and natural gas prices that hoisted jack up rig demand in the second quarter also drove revenues higher for Houston-based drilling contractor Global Marine Inc. Large independent exploration and production companies have generated much of that demand, says Bob Rose, chairman, president, and CEO of Global Marine. Major oil companies will have to step up their spending before a rebound can occur in second and third-generation semisubmersible rig markets such as the North Sea, the company said.
Rose noted that E&P activity among independents, not spending by major oil companies, is driving day rate rises. While a few large companies such as ExxonMobil Corp. and Chevron Corp. are active in the Gulf of Mexico, large independents make up the bulk of companies drilling in the jack up market.
However, the outlook is promising for drillers in the long run, said Rose: "No longer will the industry or OPEC [Organization of Petroleum Exporting Countries] be able to deliver product just by turning on the faucet. New wells will have to be drilled" to replace oil supplies and ease the tight natural gas market in the US.
BP Amoco PLC executives in London said last week the supermajor will increase worldwide exploration and production spending to $8 billion in 2001 from $6 billion this year. Global Marine said it anticipates the rest of the supermajors will follow suit.
During a conference call Friday, Global Marine officials reported second quarter net income of $28.1 million on revenues of $231 million, compared to earnings of $28.2 million on revenues of $196 million for the same period in 1999. For the first 6 months of this year, Global Marine recorded net income of $40.7 million on revenues of $435 million, vs. net income of $65 million on revenues of $424 million in first half 1999.
While the jack up markets in the Gulf of Mexico and West Africa rose during the second quarter�with spot day rates in the gulf increasing threefold from a year ago�markets for second and third-generation semis, such as the North Sea, remained weak.
Rose said North Sea activity would pick up, as the gulf market has, if majors would sell or farm out properties to large independents. But majors who own or have access to deepwater drilling equipment will have to get back in the drilling game, said Rose, adding that he doesn't expect to see any "meaningful" improvement in that market until spring of 2001.
The fundamental outlook for Global Marine remains optimistic, says Rose, as the company anticipates more of the majors will follow BP Amoco's lead and increase E&P spending. Until then, Global Marine expects its third quarter results to closely mirror second quarter earnings and revenue and predicts average jack up day rates will remain flat until fourth quarter.
Rose added that the current $30/bbl oil prices aren't necessary to stimulate drilling. "We think that a West Texas Intermediate oil price in the mid-$20s range would be good for the industry and consumers and provide a longer, more sustainable period of growth."
The company's rig utilization rate averaged 84% in second quarter 2000, up from 76% the preceding quarter and 78% in second quarter 1999. Global Marine's jack ups in the gulf are fully contracted through the third quarter, and the company's overall average day rates rose to $59,400/day this quarter from $52,000 the first quarter.
Rose noted that Global Marine is seeing "more complex wells" being drilled in the gulf as surging demand is prompting companies to go after reserves they didn't want before.
Global Marine's turnkey drilling operations experienced a less active second quarter, with 20 wells drilled and 3 completed, down 30% from the 29 drilled and 7 completed during the first quarter. Bidding activity in this business segment strengthened during the second quarter, reaching 205 bids. Cost per well also rose to $3.2 million/well from the $2.1 million price recorded during second quarter 1999.
Global Marine saw some slight erosion in project margins for turnkey drilling from the first to second quarter, but the company is making up for that erosion with increased turnkey activity. The company already has drilled 22 turnkey wells and scheduled 3 well completions in the third quarter.
Hiring enough personnel remains a priority for Global Marine and the rest of the industry. Rose said the company recently gave its staff a 5% aggregate raise to sweeten its recruitment efforts. The shortage of personnel also remains a mitigating factor keeping companies from doing more exploration and drilling, says Rose.
Global Marine will reactivate two previously idle rigs in response to tightening jack up markets. The Glomar Labrador I was delivered this month to work under a 15-month contract in Trinidad with EOG Resources Inc., and the Glomar High Island IX will begin operations off West Africa in a few weeks.
The company also put its newly constructed Glomar C.R. Luigs ultradeepwater drillship to work on Apr. 21 for BHP Petroleum Pty. Ltd. in the Gulf of Mexico at $200,000/day. A sister ship, the Glomar Jack Ryan, is 98% complete and expected to be delivered during the third quarter. The Jack Ryan is in the Irish Sea, where its marine systems are being commissioned. It will undergo final outfitting and commissioning of its drilling systems either in Belfast or on the US Gulf Coast.
While Global Marine's rig utilization rate has increased, Rose said that three rigs�the semisubmersible Grand Banks and the cantilevered jack ups Glomar Arctic III and IV, which had been drilling in Canada and the North Sea�have been stacked and would likely remain idle the remainder of this year. The outlook could change, should day rates and drilling demand continue rising, noted Rose. He said the company has no plans to move those rigs to different markets.
Two cantilevered jack ups, the Glomar Adriatic VI and XI, will be coming off high-day-rate contracts with BP Amoco PLC and Lasmo PLC, respectively, in November, said Global Marine. But Rose said the impending debut of Jack Ryan into service would give Global Marine a financial leg up on its fourth quarter results.
The company has no plans to build any new rigs, said Rose, adding that day rates would have to rise enough to ensure Global Marine would get a long-term contract to guarantee a full return on construction costs.
Despite the increase in drilling activity, long-term opportunities haven't materialized in the Gulf of Mexico, he added. Global Marine wouldn't consider locking in a long-term contract until revenues rose to 75-80% of the rig's replacement cost, says Rose.
"Even in a peak market, long-term opportunities are rare," he noted, adding that the company had upgraded the earning power of its fleet during the last market peak.
If the company did pursue long-term agreements, the length of those contracts would be shorter and the contracts staggered to keep the company from being locked into contracts with day rates falling as they did during the industry's last down cycle.