Normally, I wouldn't want to post the whole thing, but considering the importance of SLB and the whole dayrate thing to the sector as a whole, here goes.
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Top Stories: Talk of Flagging Dayrates Deals Another Blow to Oil Services Stocks
By Mavis Scanlon
Staff Reporter
12/22/97 9:36 PM ET
After several weeks of struggling stock performance, the first fundamental indication of real trouble in the oil patch may be here.
Two recent contract announcements for certain drilling rigs reportedly fetched lower-than-expected dayrates, raising prospects that the sharp gains seen in this sector during the past year may be starting to peter out. Last week Sedco-Forex, Schlumberger's (SLB:NYSE) contract-drilling unit, announced two five-year contracts for its newly designed Sedco Express 2000 rig -- one with Elf Aquitaine offshore West Africa and one with Texaco (TX:NYSE) in the Gulf of Mexico.
The oil services giant is notoriously quiet in discussing its business dealings, and didn't comment on any costs associated with the contracts. The Gulf of Mexico Newsletter reported on Dec. 8 that the newly designed rigs could fetch rates upwards of $175,000 per day, about in line with recent contracts. Then, in his weekly research note Monday, John Lovoi at Morgan Stanley Dean Witter in Houston confirmed market speculation that Schlumberger entered into these contracts, both of which are slated to start in the fourth quarter of 1999, at rates of $160,000 to $165,000 per day -- "roughly 25% below current market," he said.
Dayrates are to the drilling group like blood is to a vampire. Once dayrates start drying up, the group starts to tumble. Lovoi did his best in a morning note to inject a bullish flavor into the recent contract news. But stocks in the group performed weakly, indicating that more severe difficulties could be in the offing.
The Oil Service Index (OSX) tumbled 3.2, or nearly 3%, to 103.4. The index of 15 service and drilling stocks -- still up 50% for the year -- is down a sharp 25.6% in the past six weeks.
"It's much, much worse if the rumored dayrate is not below some projected rig rate for 1998, but below the dayrate that you can get a rig for today," says Richard Hunter, an analyst at Lighthouse Capital, a Houston-based money-management firm.
In another contract announcement last week, Reading & Bates (RB:NYSE) announced it had signed a contract extension with a unit of Mobil (MOB:NYSE) for its Jack Bates semisubmersible rig to drill in the North Sea. That contract, for two years (or eight wells), was valued at $146.7 million, or a dayrate of $200,000. Another North Sea contract inked in October between Transocean Offshore (RIG:NYSE) and Statoil AS garnered RIG a dayrate of $190,000. But these high-end dayrates are for rigs built to work in the North Sea, some of the harshest conditions in the world in which to drill.
Operators working rigs drilling in North Sea conditions can easily add $100 million to the costs of building the rig, says Matt Simmons, president of Simmons & Co., a Houston-based research firm and investment bank. And any rig operator working in the Norweigan sector of the North Sea, as Transocean's Transocean Arctic is, can easily add $15,000 per day just to pay the higher costs of labor and equipment.
Schlumberger will not discuss dayrates or costs to build its new rigs, says spokesman Gary Yamamoto. But the cost to build is less than a typical new-build of this type, he says. The rigs are redesigns rather than new designs, and since both are being built by the same shipyard, the company has increased its economy of scale. Schlumberger doesn't comment on rumors, and the company also doesn't discuss dayrates, says Yamamoto, in order to keep the competition guessing. He did say, "There are no advantages to us cutting our prices or doing something that would not be beneficial to the company."
Nevertheless, if dayrates begin to trend down, the recent selloffs in the sector would seem more on target rather than, as Lovoi notes, "yet another sentiment-driven overreaction." The selloffs have been attributed to unease over exploration and production companies' capital expenditure budgets and the turmoil in Asia. "In hindsight it looks smart, even if it's not a correct interpretation" of market indicators, says Hunter at Lighthouse.
Lovoi believes the Sedco-Forex contracts contain significant value-added components, which may render comparing those deals with other recently signed deals like comparing apples with oranges. He wrote: "Our belief is that the ultimate structure of the agreement between Schlumberger and the two operators will likely include three components: 1) a base dayrate, which may be nominally below existing market, 2) agreements to use the full suite of SLB oilfield services -- directional drilling, measurement-while-drilling, pressure pumping, drilling fluids, and wireline logging -- over the five-year term of the contract, and 3) a significant performance bonus in the event that the integrated nature of this asset does truly deliver value-added to the customer in the form of a clean well drilled in a significantly shorter period of time. In short, there will be much more to this contract than $160,000 - $165,000 per day."
Even with that strong view, the group fell on another tough day. SLB closed down 1 1/16 to 73 3/4, a price it hasn't closed at since Aug. 22. Other offshore drillers also fell: Marine Drilling (MDCO:NYSE) fell 15/16 to 18 9/16, RIG dropped 1 1/8 to 41 7/8, and Rowan Companies (RDC:NYSE) slid 2 5/8, to 27 5/16. Oil services company Halliburton (HAL:NYSE) fell 1 1/16, even with the news that its Brown & Root Energy Services division will be part of an alliance Chevron (CHV:NYSE) has formed to develop its Gulf of Mexico properties. Parker Drilling (PKD:NYSE), a major land-driller, dropped 9/16 to 11 /14, and Nabors Industries (NBR:AMEX) dropped 9/16 to 28 9/16.
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