Bill: Inflation has some impact on drillers (like all other sectors), due to the Fed's overall influence in the equity markets, but IMO the sector fundamentals are so powerful that the relative impact of inflation will be minimal by comparison. Offshore dayrates are rising sharply, and there's still more room to go before we reach the point where newbuilds become economically attractive. (ENSCO showed a great bar chart comparison illustrating this fact at a recent industry conference; possibly the same presentation you saw.)
IMO, drillers tend to rise and fall more in tandem with crude and natural gas prices than inflation (except when inflation is actually being driven by rising oil prices, like in the 70's, in which case inflation is actually an effect, not a cause). Shallow water gas drillers are very sensitive to Henry Hub and spot prices; the deepwater drillers (e.g., DO) are a little more insulated with longer development schedules and virtually no spare capacity available. But overall, most of the drilling sector still has great upside potential. The main reason is that most of the majors, domestic integrateds, and independent E&Ps are not only increasing their exploration budgets, but the spending commitments are usually quite firm for a 2-yr forward time horizon.
IMO, technology is what's actually driving the industry right now. Despite limited equipment and even more limited experienced personnel (factors which tend to drive up operating costs), the technological advances from 3D seismic and horizontal/multi-lateral drilling are helping to keep overall F&D costs down, so production is now more economical than before. (That's what allows the rapid top-line revenue growth that we've been witnessing throughout the entire service sector.) Typical cycle: drillers get lifted first, then the offshore construction firms (e.g., MDR or JRM), which lag about 9-12 months behind as platform construction demand starts to climb only after successful drilling.
Just my two cents...
Hope this helps. |
