Long-Term Deals Helped Oil-Service Companies Profit in a Difficult Year
Houston Chronicle, May 22
Despite bottom-scraping oil and gas prices,
eight offshore drilling and service companies
were among the most profitable public
companies in town last year.
While many of the companies that depended
on oil and gas exploration and production
announced big losses last year as they wrote
down their reserves, many service companies
continued to turn profits.
How did they do it?
The service companies signed long-term
leases during a period of prosperity at the
end of 1997 that delayed the day when the
profits vaporized. They husbanded that
income stream with deep layoffs.
Those contracts provided income for drillers,
such as Atwood Oceanics, and Global Marine,
which runs the equipment energy companies
use to search for oil and gas.
The safety net also extended to GulfMark
Offshore, which handles towing, emergency
services and other services for deepwater
rigs, and Cal Dive International, an
underwater service company that also
salvages old drilling platforms and pipelines.
"There's a lag in this business between the oil
prices going down and the activity going
down," said Stephen Smith, an oil analyst in
Houston for Dain Rauscher Wessels in an
interview in early May. "We're still two or
three months out from seeing companies stop
using rigs."
The oil and gas service sector also had
healthy returns on equity, which is
determined by dividing a company's earnings
per share by its book value, which is the
difference between the company's assets
and liabilities.
However, continuing profits and a recent
price rally did little to brighten Wall Street's
gloomy view of the oil and gas exploration
business.
Declines in service stocks ranged from a 3
percent drop for Cal Dive for the 12 months
ended April 30, to declines of around 40
percent for Atwood Oceanics and Global
Marine during the 12-month period. That
contributed to some of the energy-related
companies ranked in the Chronicle's top 25
profitable companies posting less net income
and profit growth last year than in 1997.
Long-term leases range from one to five
years. So, contracts are just now starting to
run out and drillers are facing the hard choice
of leaving rigs idle or running them for daily
rates that are less than what it costs to
operate them.
"The declines have been ugly," said Phil
Dodge, an energy analyst with Southeast
Research Partners in Boca Raton, Fla. "In
general, rig rates have declined 30 percent to
75 percent from their peaks."
One of the hardest hit segments has been
jack-up rigs -- drilling platforms with
moveable legs that allow them to stand on
the ocean floor in relatively shallow waters
off the Outer Continental Shelf. Since drilling
has dropped off more in the Gulf of Mexico
than in deeper waters, the daily rates paid
for jack-ups has gone down to $15,000 a day
from as high as $80,000 a day in late 1997.
But analysts predict the sharp upswing in oil
and gas prices from the low teens to near
$20 a barrel will pull the service sector out of
this downturn soon.
To stay profitable, major energy companies
and exploration and production firms have to
look for and extract oil and natural gas from
the earth, says Michael Henzi, an analyst
with Stephens Inc. in Boston. So when the
prices gain some stability, rig rates will go
back up.
"If history is a guide, the nimble, larger
independents will start drilling first and some
of the majors and supermajors will start to
put their toes into the water."
But the recovery probably won't kick into full
swing until fall or winter, the analysts
predicted, and profits are unlikely while the
industry waits.
In the meantime, the service business --
which has eliminated 50,000 jobs to reduce
operating expenses -- has to look for further
cost reductions.
"These drilling contractors run pretty lean,"
Henzi said. " There's not a lot of cost-cutting
to be done, other than laying off people. "
Cooper Cameron Corp., which makes, sells
and services oil and gas equipment and
ranked No. 24 on the highest return on equity
list, cut its work force by 10 percent last
year because of falling demand. But drilling
contractors run the risk of losing a
well-functioning rig crew when they take
similar steps.
Ultimately, the analysts said, 1999 should be
a profitable year for the companies and their
investors. But the continued high oil prices
are hardly a sure thing and oil and gas
companies won't increase their drilling
budgets until they are.
Which means people with a low tolerance for
risk should put their money in a less messy
industry. By the time the quarterly reports
show profits, the best investing window will
be closed. |
