Drilling & Servicer related.
Current rig count numbers:
207.54.118.165
caodc.ca
CAODC Sector forecast (oct 2002):
caodc.ca
Baker Hughes Rig Counts (oct monthly news release):
corporate-ir.net
The oil firms have nothing to cry about
By DEBORAH YEDLIN Monday, November 11, 2002 (g&m)
Oil patch service companies were crying in their beer this week, bemoaning the drop in third-quarter profits from the record levels set in 2001.
Hank Swartout, president, chairman and chief executive officer of Precision Drilling,attributed part of his company's 70-per-cent drop in profit for the quarter to the proliferation of royalty trusts, whose strategy is to exploit existing assets and not explore for new reserves.
But recent drilling numbers show that there are 19 fewer rigs operating than at the record levels of this time last year, and an informal survey of the drilling companies shows they are booked solid through the winter drilling season. In fact, some are saying their "cupboard is bare" through 2003 because their rigs are completely committed.
While Mr. Swartout has a point, because the royalty trusts have put close to $2-billion back into the pockets of unitholders instead of putting the money back into the patch via exploration and development, there is more to the story than the royalty trusts.
It used to be that one dollar in cash flow would translate into one dollar put toward finding new reserves. It was, in effect, a closed-loop system.
But, as the basin has matured, a number of factors have altered the landscape.
One is that money is leaving Canada and looking for bigger wins elsewhere.
The second is that because the basin is mature, it's harder to spend all of the cash flow generated. That means there is money going to Ottawa in the form of cash taxes.
In 1997, the best year for drilling in terms of utilization rates, the patch generated $16-billion in cash flow. In 2001, a record year for the number of wells drilled, the cash flow was $32-billion. There is no way there are $32-billion worth of opportunities in the basin, and that is why more companies are looking at the tax-effective structure of a royalty trust.
The third issue is that an increasing amount of cash is being spent on unconventional projects, such as the oil sands. In 1997, 33 per cent of capital expenditures were allocated to drilling -- today it's 29 per cent.
Finally, the royalty trusts, while paying out healthy cash distributions, have also raised about $1-billion in new financing, and some of that is finding its way back into the ground.
Mr. Swartout needs to look at the glass as being half full, because a new exploration and development strategy is taking shape in the oil patch.
First, there are all the resurrected management teams that have started up in new corporate vehicles, both public and private, that are under the gun to show impressive growth.
And those objectives are not going to be achieved by doing corporate acquisitions, so that leaves growth by the drill bit.
It's especially true when it comes to natural gas because the only way to increase production levels is by meaningfully boosting spending on drilling for natural gas.
There's also the recent phenomenon of mid-capitalization companies splitting assets into royalty trusts and exploration companies as a way to create value for shareholders while maintaining control of the potential upside. It's the new exit strategy for the mid-cap segment of the market.
Another strategy is one that involves an acquisition, such as when Paramount Resources bought Summit and then restructured the new company into two separate trust and exploration vehicles.
Taken together, all these developments bode well for a healthy drilling season, with some analysts predicting that activity for 2003 could be close to the record 18,100 wells drilled in 2001.
But there is one caveat.
While the outlook for natural gas appears healthy over the next two years, after almost a year of surprisingly strong oil prices, analysts are starting to fret about the effects of President Bush's Iraqi strategy.
It won't take much, at the margin, to meaningfully boost production from Iraq by upgrading existing infrastructure and cause oil prices to go south.
A high oil price chokes off U.S. growth, and with the American economy on shaky ground it's a safe bet that President Bush prefers an oil price closer to $20 (U.S.) than $30.
Yet, even with the commodity price uncertainty, 2003 is shaping up to be a better year than 2002, and Mr. Swartout, along with the rest of the service sector, should start looking at a glass that is indeed half full. |
