From DRW this morning:
WEEKLY OILFIELD SERVICES REVIEW
The Baker Hughes U.S. rig count declined by 11 rigs to 1,067 working rigs.
Land-based drilling accounted for all of the decline, dropping 17 rigs to
889, partially offset by an increase of one offshore and five inland water
rigs. This is not surprising since, even at maximum capacity utilization,
land rigs often face down time while changing sites, facing weather delays,
and preparing drilling locations. The number of U.S. rigs searching for oil
fell by six to 226, while the number of rigs searching for gas fell by five
to 840. The Canadian rig count continues to suffer from weather-related
difficulties, dropping 34 rigs to 328 working rigs.
Last week, we understand that a large operator signed a one-year contract
for a land rig in the South Texas region with one of the major land drillers.
The contract calls for a dayrate of $12,000, which is nearly 20% greater than
the current market rate for a rig of similar capacity. Since costs are
essentially fixed, this immediately increases the daily operating profit of
this rig by approximately $2,000 per day. Term contracts are somewhat unusual
in the land-drilling industry where rigs are typically contracted from job to
job. This suggests that operators are becoming increasingly concerned
regarding both rig availability and the direction of dayrates during the next
12-18 months. In some regions, there is a three to four month waiting period
to obtain a rig. While there are still a significant number of additional
rigs that can be brought back to work, limited crew availability, parts
shortages, and capital expenditure requirements have slowed the pace at which
this capacity can be brought to market. Accordingly, we would not be
surprised to see more operators willing to pay higher current dayrates in
order to guarantee a rig.
Offshore Data Services figures suggest that utilization of mobile offshore
drilling units (MODU) generally held constant during the last week.
Worldwide, 579 of 672 MODU are working, implying a utilization of 86%. Total
floater utilization was 83% with 161 of 194 rigs working worldwide. Total
jack-up utilization remained at 90%, although the count of contracted rigs
declined by two since last week. Utilization of Gulf of Mexico floaters
remains at approximately 74% due to the persistent lack of demand for semis
able to work in up to aapproximately 2,500 feet of water. The Gulf of Mexico
shallow-water play remains healthy with jack-up utilization unchanged from
last week at 91%.
As the current recovery strengthens, we fully expected drillers to begin to
explore options for the addition and renewal of capacity. We are a bit
surprised, however, at the aggressiveness of what may be the first iron in
the fire: Santa Fe International Corporation (NYSE: SDC; SB-Avg; $36.19) has
reportedly solicited bids to construct up to 10 new offshore rigs comprising
six 400 foot capable, moderate-environment jack-ups and four deepwater semis.
While no contracts have been let, we understand that, should the newbuild
effort proceed, delivery of the rigs would begin sometime in 2002. At this
point we believe that all of the rigs are of a speculative nature.
From a practical perspective there is certainly a need to begin renewal of
the aging jack-up fleet: the average age is approximately 20 years. Timing is
key, and while it is historically unreasonable to hope that operators would
endorse new construction jack-ups with a lead contract, we would hope that
drillers would proceed with all due prudence down the newbuild path--a lot
can happen in 18 months. We also acknowledge a need for additional deepwater
floater capacity in the 2002 timeframe, but we are still burning off some
excess capacity from the relatively disciplined capacity additions of
1996–1999. No news here: this is a highly cyclical industry. Drillers need to
use normalized dayrate assumptions and pay scrupulous attention to the
resulting return on capital employed when making decisions to add capacity.
The bottom line is that this potential development bears careful scrutiny.
Following its meeting this last weekend, OPEC stated that after four
production increases, it will not increase production again this year and is,
in fact, considering the possibility of production cuts in early 2000. This
development is not surprising since we have been saying that at current OPEC
production levels (approximately 31 MMbopd), OECD inventories will show a net
build regardless of U.S. inventory numbers, and that will cause either oil
prices to drop next year and/or OPEC to cut production next year. Going
forward, oil prices might move slightly higher as it is winter, and there is
a seasonal surge in demand. However, on a sustained basis, we see more need
for reductions than increases. We believe the cartel's actions will provide
some support for commodity prices as investor's fears of a post-winter price
collapse are somewhat alleviated.
Stock Opinion
Oilfield services stocks have sold off significantly during the past several
weeks due to year-end profit taking, unseasonably warm weather, and weakness
in commodity prices. The OSX has dropped from a close 131 on October 20,
2000, to its current level of approximately 112. This sell off comes despite
the fact that almost all company's in our coverage universe have met or
exceeded earnings expectations for the third quarter. We believe this sell
off represents an excellent entry point for investors into the sector.
Our recommendations remain unchanged and include companies that we believe
offer the most near-term potential for revenue growth and have favorable
valuations relative to our coverage universe. These include offshore drillers
Pride International, Inc. (NYSE: PDE; SB-Agg; $23.69), Rowan Companies, Inc.
(NYSE: RDC; B-Agg; $24.44), Global Marine Inc. (NYSE: GLM; B-Avg; $26.25).
Our land driller, oilfield equipment and services picks are: Key Energy
Services, Inc.(NYSE: KEG; SB-Agg; $9.06), UTI Energy Corporation (AMEX: UTI;
SB-Agg; $19.56), Nabors Industries, Inc. (AMEX: NBR; SB-Agg; $50.38), Hanover
Compressor Company (NYSE: HC; SB-Agg; $32.38), BJ Services Company (NYSE:
BJS, SB-Agg; $50.88), Lone Star Technologies, Inc. (NYSE: LSS; B-Agg;
$39.89), and Varco International, Inc. (NYSE: VRC; SB-Agg; $17.81). |
