Another Drop In Offshore and U.S. Rig Counts -- Dec 17 2001
by Rick Olivere, CFA
With uncertainties about the impact of the linkage between demand for oil and natural gas and the economic consequences of the terrorists attacks on September 11th, we are again publishing our weekly rig count review in an abbreviated format to provide an update for investors following the trends of rig counts. In the near term, we believe investors are awaiting a formal announcement by OPEC about production cuts following Monday's announcement that Norway would reduce production by 150,000 b/d for six months contingent upon other producers' reductions. The current high level of crude oil inventories resulting from the global economic slowdown contrasts with the prospects of improved demand for crude oil and natural gas both from the approaching winter season and a cyclical economic recovery. We continue to believe the confluence of these events is likely to result in upward pressure on crude oil and natural gas prices to support future drilling activity to address the long-term imbalance between production and consumption of oil and natural gas. For investors who share this view and recognize the price risk of day-to-day news events, we have reinstated our buy recommendations of selected energy and energy service shares listed at the end of this review. <BR><BR>A brief summary of developments with Mexico, Norway, Russia, Iraq and surveys of OPEC production in November is outlined after the list of our buy recommendations at the end of this review. <BR><BR>The worldwide offshore rig count, for the week of December 14, decreased by 1-net rig, from a month ago, to 530 and decreased by 30-net rigs, from a year ago, with notable increases outside the Gulf of Mexico (GOM). The rig count for the US fell by 86-net rigs to 907, during the past month, 29.9% below the July 2001 peak of 1293. <BR><BR>The Weekly Mobile Offshore Rig Count survey by ODS-Petrodata Group shows rigs under contract for the week ended December 14th fell 4-net rigs in the GOM to 120. This follows the number of rigs working under contract in the GOM rising 3-net rigs to 127 in the week ended November 30th, representing the second week-to-week increase since May 4th. The GOM rig fleet fell 2-net rigs to 203 last week, with 10-net rigs leaving the GOM since September 7th for work in other offshore drilling markets. Rigs under contract fell 2-net rigs to 97 in Europe and rose 4-net rigs in the rest of the world (ROW) (outside the GOM and Europe) to 313, last week. The number of rigs (313) now working in the ROW compares with 308 a month ago and 292 a year ago. Worldwide the number of rigs under contract fell 2-net rigs to 530.
* Current utilization of the GOM fleet fell to 59.1% from 59.9% a month ago. This compares with peak utilization of 91.0% in the week ended May 4th when 192 rigs were under contract and the GOM rig fleet numbered 211. With the aforementioned movement of rigs out of the GOM, we believe scrutiny of rig counts in the next few weeks is likely to intensify.
* Current utilization of the Europe/Mediterranean Sea fell to 94.2% from 95.2% a month ago. This reflects the decline of the rig fleet by 1-net rig to 103 last week and the aforementioned fall of 2-net rigs under contract.
* Current utilization of the rig fleet in the ROW fell slightly to 90.2% from 90.3% a month ago. This partially reflects the addition of 8-net rigs to the fleet since September 7th, with seven of these rigs commencing work under contracts in the last six weeks including the addition of a newly constructed semisubmersible drilling rig beginning work off the coast of Angola three weeks ago. As rigs commence work under contracts, we expect the utilization number to increase in coming weeks.
* Current utilization of the worldwide offshore rig fleet fell slightly to 81.2% from 81.4% a month ago. Over the past 12 months, the worldwide fleet has increased 6-net rigs to 653, with four rigs retired and 10 newly built rigs entering the fleet.
* Royal Dutch Shell [RD: NYSE] announced today that it was raising its long-term Brent crude oil price assumption to $16 per barrel from $14. The benchmark price is its threshold for measuring the financial viability of new projects for attaining its goals of output growth of 3% and 13%-15% return on average capital employed. BP [BP: NYSE] adopted a $16 price assumption in July. A higher benchmark price assumption allows commitment to projects with higher production costs per barrel. Over the past 10 years, Brent crude has averaged $19 per barrel.
* Halliburton [HAL: NYSE] announced on December 7th that a jury in Baltimore, Maryland, returned a verdict against defendants, including its subsidiary Dresser Industries, for asbestos-related injuries, with Dresser's portion of the damages amounting to $30m. HAL also announced it would appeal two adverse rulings in the district court of Orange, Texas for amounts of $65m and $35m. As we stated in our June 29 sale recommendation of Halliburton, we are unable to evaluate the magnitude or likelihood of potential liabilities related to asbestos and related impact on Halliburton's finances or earnings and continue to recommend investors unable to withstand market volatility related to the uncertainties of asbestos-related events to avoid HAL shares.
* Rowan Companies [RDC&type=Quote" type="text/html">RDC: NYSE] reported that the English Court dismissed Amoco's claim that it was entitled to terminate its contract for Rowan Gorilla V in January 1999 and ordered Amoco to pay RDC&type=Quote" type="text/html">RDC more than $85m. BP [BP: NYSE] acquired Amoco. While subject to appeals, we believe this court order is a constructive development for RDC&type=Quote" type="text/html">RDC.
* Enron [ENE: NYSE] announced on December 2nd that it has filed for Chapter 11 bankruptcy in the bankruptcy court of the Southern District of New York, with debt and obligations of at least $16.8bn. ENE also filed a breach of contract lawsuit against Dynegy [DYN: NYSE] for terminating the merger of the two companies, and ENE is also seeking to stop DYN from exercising its option to acquire ENE's Northern Natural Gas Pipeline. While the extent of Enron's outstanding commitments and derivatives is unclear, we do not believe the bankruptcy filing is likely to have a sustained impact on oil and natural gas prices. That is, we believe investors' focus is likely to shift to production cuts, compliance with announced production targets, and economic data that relate to current and prospective demand for oil and natural gas.
* Baker Hughes' [BHI: NYSE] rig count survey, for the week that ended December 14, shows the number of rigs working in the US decreased 21-net rigs to 907, from a week ago. The rigs drilling for natural gas in the US fell by 12-net rigs, last week, to 757, as compared with 862, a year ago. The number of rigs working in Canada rose 15-net rigs, last week, to 289.
<BR>Our purchase recommendations of energy producers include the following: BP [BP: NYSE], Burlington Resources [BR: NYSE], ChevronTexaco [CVX: NYSE], Forest Oil [FST: NYSE], and Occidental Petroleum [OXY: NYSE]. In a period of market volatility and the current level of market interest rates, we continue to believe the shares of large, international oil and natural gas producers BP, CVX, and OXY are likely to be supported by current dividend yields of 2.99%, 3.33%, and 4.04%, respectively.
Our purchase recommendations of energy service companies include the following: Baker Hughes [BHI: NYSE], Cooper Cameron [CAM: NYSE], Diamond Offshore [DO: NYSE], Grey Wolf [GW: ASE], Nabors Industries [BR&type=Quote" type="text/html">NBR: ASE], Parker Drilling [PKD: NYSE], Pride International [PDE: NYSE], Rowan [RDC&type=Quote" type="text/html">RDC: NYSE], Global Santa Fe International [GSF: NYSE], Transocean Sedco [RIG: NYSE], and Varco International [VRC: NYSE]. <BR>A summary of developments involving Mexico, Norway, Russia, and Iraq includes the following:
* Oil Minister Einar Steensnaes of Norway announced Monday that Norway would implement production cuts of 150,000 b/d for six months beginning January 1, contingent upon other producers moving ahead with announced production cuts. OPEC has not yet responded. This brings non-OPEC production cuts to 447,500 b/d, as compared with OPEC requests for reductions of 500,000 b/d. These cuts include the following: Norway (150,000), Russia (150,000), Mexico (100,000), Angola (22,500), and Oman (25,000).
* Russia announced on December 5th that it would cut crude oil exports by 150,000 b/d beginning January 1,2002. Stanislav Naumov, a spokesman for Russian Deputy Prime Minister Viktor Khristenko, said, according to news reports, that no time limit had been set for the cut, which had been decided at a meeting between Prime Minister Mikhail Kasyanov and the heads of Russian oil companies. Russia's daily production is expected to rise 6% this year to 6.9m b/d, according to industry analysts. This compares with peak production of 10.9m b/d in 1985 and 6.2m b/d in 1998. Russia's government exerts leverage over the nation's oil companies through control of the country's export pipelines, with the companies conducting oil production, not the government. We believe this announcement, along with production cuts of other producers discussed in the next paragraph, diminish the risks of a price war.
* Russia, Norway, and Mexico are reported to export 4.3m b/d, 3.1m b/d, and 1.4m b/d, respectively. We also continue to expect investors to focus on any reports about OPEC members reducing shipments to bring actual production in line with targeted production of 23.2m b/d. Production of Iraq is subject to United Nations trade sanctions, and is excluded from targeted production levels.
* Discussions at the UN last week resulted in a vote on November 30 calling for a six-month renewal of the oil-for-food program related to exports of Iraqi oil. Reuters reported over the weekend that Iraq has resumed oil exports. This diminishes fears of a halt in Iraqi oil exports. Daily exports approximated 2.8m b/d in November, according to the Bloomberg survey.
* Statements by President Bush that Iraq should open its borders to inspections for "weapons of mass destruction" raised the possibility that the "war on terrorism" could spread from Afghanistan to the oil production of Iraq.
* Bloomberg estimated that crude oil production in November from the 10-member Organization for Petroleum Exporting Countries (OPEC) fell by 350,000 barrels per day (b/d) from a month ago to 23.66m b/d. This compares with the current Targeted Production level of 23.2m b/d and represents "improved compliance" with announced cuts. We believe investor focus is likely to turn to confirmation of this "improved compliance" from other surveys of OPEC production--with obvious implications for the balance of supply and demand in world oil markets and discussions of further production cuts.<BR> |
