R&B Falcon and the gas-, oil-drilling industry
High commodity prices have yet to make big improvement
By Myra P. Saefong, CBS MarketWatch
Last Update: 3:51 PM ET Sep 19, 1999 Futures Movers
NewsWatch
HOUSTON (CBS.MW) -- Prices of crude oil and natural gas have dramatically risen from historical lows hit late last year, but the increase has yet to significantly impact offshore drilling companies like R&B Falcon.
R&B Falcon (FLC: news, msgs), the oil and natural gas industry's largest and most diversified offshore drilling company, was able to make profits despite the suffering commodity prices until its most recent second quarter, when it reported a loss of $23.3 million, or 12 cents per share. See press release. The Houston-based company attributed the loss to a reduced demand for drilling services.
CBS.MarketWatch.com spoke with R&B Falcon's Chairman and Chief Executive Officer Paul B. Loyd and the company's Chief Financial Officer Tim Nagle to get their views on how rising commodity prices will affect their company's future. Loyd had provided a presentation on R&B Falcon at Dain Rauscher Wessels' seventh annual energy conference held earlier last week.
So how has the improvement in natural gas and oil prices really affected your business?
Loyd: So far, they really haven't had a large effect, although we've had the rig count move in the jackup market in the Gulf of Mexico from roughly 71 rigs in April to 98 rigs today. So we started to see a little bit of a movement. I think the main thing -- in the Gulf of Mexico anyway, in the natural gas market, with that price increase -- I think what we're hoping is that our main customer base, which are independent oil companies, will be able to obviously have increased cash flows and raise more money. Therefore, they'll do more drilling and this price is an attractive price, in our view, for them to begin a lot of their drilling programs.
Now why does the market in the Gulf of Mexico appear to be strengthening?
Loyd: It's clearly driven by the price of natural gas. Most of the really big reservoirs of gas have been found, particularly in shallow water, so they drill smaller reservoirs now and they need a higher price to make those economic to them, meaning the independents. I think the price of $2.75, $3 is high enough for them to do that.
Do you have any predictions for the price of natural gas for the end of 1999?
Loyd: Actually, it's hard to say because a lot of that is affected by the winter and how many cold days we have and as you know, we've had some warm winters here recently. I think maybe three out of the last four have been very warm, so it's hard to predict in the short-term, but what's clear to us, is that the longer you go without drilling, the further behind you get in the ability to supply gas to the U.S. natural gas market. Based on what we see in terms of demand going forward, if you don't start increasing the amount of drilling, you won't have enough gas.
Now whether that happens in the next two or three months or whether that happens next year, is hard to say. We would think that it would be no more than next winter before we would actually get in balance and may be even under-supplied in that market. That would have a lot to do with how cold this winter is, how warm next summer is and how cold next winter is. But we wouldn't see it being any longer than that.
Do you have figures on your current rig utilization rates and date rates?
Loyd: Every one of our new-built rigs has a contract, except for a couple of the conversion rigs, the P-VII (Peregrine VII) and the Falcon 100. Those were conversions that we had and those are both available in the marketplace right now. But all the other new-builds we have are 100 percent utilized.
It's difficult to give you a utilization rate across the whole fleet simply because we have such a variety of rigs from barge rigs all the way up to state-of-the-art semi-submersibles so it's really hard to give you an average without being misleading. The revenue earning power of those ranges from $11,000 a day to $200,000 and we also have some cold-stacked units.
For example, if you take the shallow water Gulf of Mexico jackup market, we have a total of say 30 rigs in that market, we're only actively marketing 15 of those. Would measure of utilization would be at 50 percent? On the other hand, we're not trying to work half the fleet, so of the fleet we're trying to work, utilization is actually 100 percent.
Tim Nagle: And that's were the upside in the company is -- an increase in utilization. Clearly if we put 15 more jackups to work in the Gulf of Mexico, you have a huge improvement in cash flow, but over-all the utilization for the company in the shallow water market is relatively low and that's were the upside is. As that improves, the company will earn a lot more money.
Now generally why are utilization rates suffering even amid the higher oil prices? They don't seem to be improving as much as oil prices.
Nagle: Well, there's always a lag-time, obviously, between the time the oil price goes up and the time the oil companies get ready and gear for programs and get ready to spend the money. I think people tend to buy the stock in advance of the actual contracts being let. But as the price of crude stays up, the expectation is that there will be greater demand for all of these rigs.
And as we talked about in the Gulf of Mexico, you've only got roughly a hundred rigs working out of 143 (in the over-all industry) so over-all utilization is under 80 percent.
What segment of your company is poised to make the biggest strategic growth in the short-term and in the long-term?
Loyd: Short-term we think it's the jackup market in the Gulf of Mexico because we're starting to see already a substantial improvement in utilization and we think that's going to accelerate as we go through the winter and the first quarter of next year. So we think that could be pretty significant. If you see an improvement in day rates and twice as many rigs working, the operating leverage in this industry is substantial. So there's an awful lot of upside involved with that market.
Longer-term, we have some deep-water rigs that are in a long-term contract and we think that market will start to improve actually next year because the major oil companies who normally use these deep-water rigs are probably going to increase their deep-water budgets for 2000. If the oil prices doesn't retreat or doesn't retreat below $16 or $18 [per barrel], we think they will increase their spending even more in 2001.
Nagle: On a percentage basis clearly it's the shallow-water fleet that is going to grow the fastest and the most, but on an aggregate cash flow amount, it'll be the deep-water fleet that will ultimately contribute more in the future.
And why is that?
Nagle: Because it's starting from a bigger base. The deep-water fleet is reasonably already utilized and contributing quite a bit of cash flow, while the shallow fleet in the Gulf of Mexico really is at about break-even now, it's not generating cash flow so as it moves up, it moves up from a very small base.
A survey conducted by First Call Corp. estimates your third-quarter results at a loss per share of 12 cents with the fiscal year 1999 at a loss per share of 33 cents. Do you expect to meet with these expectations?
Nagle: Generally, we're not giving a lot of guidance on the quarter or the year at present. I think an awful lot depends on what your view of the shallow water market is and there's a wide variation as to what shallow water rigs may be in the fourth quarter, to the extent day rates move up substantially, it changes our estimates quite a bit.
Loyd: If you look at some of those First Call numbers, there's quite a spread in what those numbers are and a lot of that will be how the different analysts actually see the market themselves. Generally speaking we don't estimate earnings or cash flow numbers at all. We do try to let the Street know exactly what rigs are working and how much they're making and all that so they can work that into their models, but we don't really forecast earnings. We don't publicize them.
Do you have any estimate as to when the improved commodity prices will actually begin to sink in, at least in terms of earnings?
Loyd: It's already starting to help. There's no question about that.
Nagle: But it is difficult to predict where the jackup rates moves from the current levels to $25,000 in the first half of 2000 or they move up faster than that, or slower than that. It's a difficult target to hit precisely.
Loyd: For example, some of our rigs in the jackup market have been contracted as high as $14,500 a day, whereas before, they were at about $11,000 a day. So we've seen some improvement in rates as well. So if you look at the swing factor, if it moved another few thousand a day and 10 more went to work, it's just a huge swing and just very difficult to predict. We think it's going to happen sooner rather than later, but we think it's not later than next winter.
In your second-quarter results press release, you said the company was poised to take advantage of increased demand in the sector. Now how has this increase actually occurred and how long do you predict an upward movement in demand and prices?
Loyd: We already have more rigs working now than we had earlier in the year, particularly in the shallow water market. All of that increase in utilization, increase in day rate flowed through the earnings.
Nagle: If we have only 15 rigs that we're currently marketing, if we market and operate and market another 15, that has a huge positive impact on us. I think that's all we're saying in that second-quarter press release quote -- that we have a lot of excess capacity and as utilization as a whole moves up, we stand to benefit the most because we have the most idle equipment available to throw back into the market as it improves.
What are the strengths of your company and what types of benefits can a shareholder gain from owning R&B Falcon stock?
Loyd: Since April, our stocks have outperformed, I believe, every company in our immediate group and we have the most upside, we think, of any other offshore drilling contractor. We can generate numbers of anywhere from $1.6 to $2.5 billion of cash flow if we recover up to either where we were in '97 or up to replacement cost. One of the reasons our stock has been a little bit of a laggard prior to that, was because we had quite a bit of leverage. I think now we've got the company in pretty good shape financially and we have enough cash now to make sure we stay around long enough to realize that tremendous upside.
What's the biggest move you've made to make such a big improvement?
Loyd: We did a financing back in April, of course it was very important to the company. We've recently closed one in August, one in September, two project financings that provided over $400 million of liquidity. It's been those financings that have done well and that's built our cash balance up substantially.
Nagle: We've proven we have the liquidity we need to be around to enjoy the recovery and people had doubts about that in the past that's why our stock suffered. Now they understand that we have the liquidity that's necessary.
Loyd: And that'll start to improve even more as we finish our construction program. We only have two rigs left to be delivered in the year 2000 and then our capital spending program goes down and then our cash would go up even more dramatically.
On a different note, your acquisition of Cliffs Drilling was completed in December. What benefits did you receive from that deal?
Nagle: It was an improvement, consolidation in the sector to some extent. We acquired jackups from Cliffs Drilling. We also acquired their turnkey and land operations in Venezuela. So it was really an avenue to expand our turnkey efforts, particularly international and to expand our jackup fleet. Those are the two primary benefits from the Cliffs acquisition.
Did the benefits meet with your expectations?
Nagle: I think the jury's still out.
Loyd: Yes, I think that's right because if that expansion occurred, that was mainly in the shallow water segment and mainly in the turnkey segment. In lower-utilization markets, turnkey will tend to suffer as well. So both those segments have not done well. So the real benefit we'd see from Cliffs, we haven't seen yet, but we would hope to see longer term.
What kind of future do you see for oil prices for the near-term and the long-term?
Loyd: That's a little more difficult to measure because at some respects you're at the whim of OPEC in terms of what they decide to produce and not produce. It's difficult to say exactly what those guys are going to do. One thing we do believe, is that they are slow to make decisions but once they make decisions, they tend to stay with them for awhile. So logic would certainly say if you just reduce your output by roughly 5 percent or 7 percent, whatever it was, and doubled your revenue, that you'll probably stay with that model for awhile.
Nagle: We think they've learned that lesson pretty effectively.
So do you think prices really hit bottom around $10 a barrel in December of last year?
Loyd: Yes. We believe that. And we believe that there's an awful lot of pressure on OPEC when the price goes down like that to do the kind of thing they did this last time. So we would not see long-term prices at $10 or $12 dollars or anything like that. We would see them much higher than that, maybe in the $18 range.
For how long?
Loyd: If you just try to take it to the next few years, something like an $18 in real numbers is probably what we would see.
Do you have any comments on the upcoming OPEC meeting?
Loyd: I don't think they'll do anything other than what they're doing. I would also point out that most of those countries don't really have the ability to increase their production a whole lot anyway. They're a little bit constrained. It takes a lot of money to ramp up production. A lot of those countries just don't have it. There aren't that many people that can really cheat in any significant amount. |
