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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: The Ox who wrote (60246)	2/14/2000 10:28:00 AM
From: The Ox	Respond to of 95453

DCR Optimistic about the Offshore Drilling Sector's Future CHICAGO, Feb. 14 /PRNewswire/ -- While it may be impossible to predict when offshore rig utilization will begin a meaningful recovery, Duff & Phelps Credit Rating Co. (DCR) has noticed certain industry developments that suggest improved conditions. Operating rates for drilling rigs have increased steadily over the past 12 months as drilling day rates for a shallow water jackup rig have risen from a low of $22,000 to current levels of approximately $50,000. Offshore drilling rig utilization has also steadily increased from a low of 72 percent during the summer of 1999, to 81 percent in February 2000. Oil prices are averaging better than $20 per barrel and OPEC countries continue to adhere to new, reduced production quotas, resulting in lower reported crude oil supplies. Also, according to Oil & Gas Journal, worldwide crude oil demand is expected to increase 6.1 percent by 2002 from the current level, and natural gas energy consumption is projected to increase 8.4 percent. Yet utilization of the worldwide mobile offshore drilling fleet is only about 81 percent, compared to about 99 percent two years ago when West Texas Intermediate and North Sea Brent crude prices reached their last post Gulf War peak of $22 and $24 a barrel, respectively. However, the current state of offshore drilling activity is not a surprise. Historically, there has always been a delay or lag effect between commodity price movements and demand for offshore drilling rigs. For example, an oil price recovery that began in February 1994 was not followed by meaningfully higher rig utilization until about May 1995. And, in late 1998, when oil prices were approaching $11 per barrel, rig utilization was still close to 95 percent. Instead of responding immediately to brief and highly uncertain changes in crude prices, major integrated oil companies have frequently elected to wait for a sustainable pricing range that will support an appropriate level of spending. This pattern can be altered by several factors. Some E&P companies are utilizing increased cash flow from higher oil and gas prices to reduce debt levels, strengthen their balance sheet or postpone spending decisions until after they complete reorganizations or acquisitions. Some of the recent mergers that have taken place are having a dampening effect on independent E&P companies' capital spending until the major E&P companies sell off properties they do not see fitting with the newly merged operations. Also, advances in seismic and drilling technology reduce the number of rigs that are required. Improved drill bits allow the same amount of footage to be drilled with fewer rigs, and better seismic data reduce the number of dry holes. The drilling industry may have learned from their mistakes during the mid-1980s when the sector experienced speculative rig building, namely in the shallow water jackup market. Commodity prices dropped and a number of drilling companies had no contracts to support the over abundance of rigs. Most current construction projects, either new builds or conversions, for the deepwater market have been undertaken only upon the signing of a drilling contract which should help maintain a balance between supply and demand for this market. Overall, the current oil price environment will be beneficial for all segments of the energy industry, including the offshore drilling market. While DCR anticipates a steady increase in dayrates and rig utilization if crude prices remain strong, it may be sometime before the industry returns to levels seen in the last peak of 99 percent utilization and record dayrates. Continued successes in the discovery of new oil fields as we have recently seen in the Gulf of Mexico and offshore West Africa are good indications that the drilling industry will continue to improve. As E&P companies continue to formally announce their capital spending plans for 2000, the demand for the worldwide mobile offshore drilling fleet will become clearer. As such, DCR will continue to analyze the companies in this sector in the context of their total operating base and their overall corporate strategy. DCR believes that an evaluation of a company's overall business risk and management's strategy during cyclical peaks and troughs is essential to determining a company's appropriate long-term credit quality. Ratings are based on normalized cash flows and coverage ratios, which allow rating changes to be based primarily on significant and sustainable changes in the company's capital structure, organization, costs and other fundamental and strategic factors rather than short-term cyclicality as seen in the oil and gas sector. The primary objective when evaluating the credit quality of an oil drilling company is to determine if and to what extent future cash flow covers interest and principal payments. With the rise in oil prices, DCR expects the drilling industry to have improving coverage ratios and credit statistics. DCR is a leading global rating agency with 34 local market offices providing ratings and research on debt issues and insurance claims paying ability in more than 50 countries. For additional research, visit DCR's Web site at dcrco.com. DCR's research is also available on Bloomberg at DCR<GO> and First Call's BondCall Direct/Research Direct at firstcall.com, as well as through other third-party providers. SOURCE Duff & Phelps Credit Rating Co. CO: Duff & Phelps Credit Rating Co. ST: Illinois IN: OIL FIN SU: RTG 02/14/2000 10:11 EST prnewswire.com