Offshore Drilling Bits Number 31
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Gulf of Mexico Jackup Fleet Summary (Top eight rig owners)
As of February 1999
Drilling Total Water Depth in Feet
Contractor Rigs < 250 250 300 >300
_______________________________________________________
Ensco 22 1 11 6 4
R&B Falcon 17 8 8 1 0
Rowan 13 0 4 1 8
Diamond 12 2 4 4 2
Marine 12 3 6 3 0
Pride 11 5 5 1 0
Global 9 0 4 4 1
Noble 8 0 3 2 3
Totals 104 19 45 22 18
Gulf of Mexico Lease Expirations
Jackup Water Depths (0-350-ft.)
Year Majors Independents Total
______________________________________________
1999 87 212 299
2000 114 202 316
2001 132 326 458
2002 123 343 466
2003 88 158 246
***********************************************************
FOCUS ON ROWAN
The self-described "different breed of cat", Rowan Companies, is the
consumate offshore drilling company. It all started with the vision
of Charles Rowan while he was working in the oil fields of the 1920's.
Charlie wanted to own a drilling rig, and he wanted to be his own
boss.
At the age of 33, Charlie Rowan quit his job and put his $16,000 on
the line to buy an Oilwell Supply steam rig. He took this rig, and
his brother Arch, and went to work in the Powell Field near Corsicana,
Texas. And there begins "The Legend of Rowan".
For hard core Rowan fans, and for those that would like to read a
colorful history of the oil drilling business from Rowan's eye, take a
look at the book written to commemorate Rowan's 75th Anniversary, "The
Legend of Rowan". It's a "coffee table" book that is full of history,
great color pictures and numerous insights. A must read for those
interested in the offshore drilling industry. Click here to learn
more:
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Rowan has not been immune from the effects of low oil prices. But
oil-patch hero Bob Palmer, Rowan's eternal leader, has a plan and he
is sticking to it. A little over two weeks ago, Mr. Palmer and Mr.
Bill Provine, Rowan VP, addressed the New York Society of Security
Analysts. Their remarks, while focused on Rowan, can be applied to
the offshore drilling industry in general. I thought it would be
useful to share those remarks with you (lightly edited).
First, Mr. Provine: (Note: Mr. Provine's comments are useful to get a
feel for Rowan, and therefore the offshore drilling industry. Don't
worry about the technical terms, just "catch his drift".)
In the past three months you have seen a number of our rigs are off
contract. Talk on the street says we are trying to keep our day rates
high -- and they are right. But there is a more important reason.
From mid-1995 through 1998, our offshore fleet worked almost 100% of
the time. We didn't have the time to make necessary upgrades on the
fleet. We decided during the following period of low day rates and
low utilization it would be the right time to do upgrades.
Here are some of the upgrades we have made:
We added a third mud pump to jackup CHARLES ROWAN, GILBERT ROWE and
MIDDLETOWN and added a fifth and sixth engine to give the rigs more
power. There are only ten jackups in the Gulf of Mexico that have
three mud pumps, and now Rowan has 30% of them. In jackup GILBERT ROWE
we added two extra CAT 398 engines, adding 3,000 horsepower to the
rig.
Our Top Drives were about 10-12 years old. We are replacing the older
units with the newer version. The new Top Drives have an extra 150
tons hook load. New design changes will lower maintenance costs and
will raise the torque rating for sub-salt and horizontal wells.
We replaced our solids control equipment with more efficient hole
cleaning equipment, capable of reducing the solid content of the mud
by 50%.
With low oil prices, oil companies are searching for ways to drill and
produce wells more economically. One solution is horizontal drilling
where the oil companies are kicking wells off at 90 degree angles for
up to two miles.
To clean the hole and avoid getting the pipe stuck requires more
annular velocity and more horsepower at the bit. Three National 12-P
160 mud pumps, powered by six CAT 398 engines, producing over 8,000
horsepower will greatly enhance the oil company's chances of getting
the well down to total depth at the lowest cost per foot.
We have increased the water depth capabilities on eight of our
jackups. There are only 18 jackups in the Gulf of Mexico that can
work in over 300 feet of water. Rowan has a 44% market share of this
segment. Day rates can run up to 100% higher for these deeper water
jackups than for "conventional" jackups rated for lower water depths.
Even with low oil and gas prices, money CAN be made in the Gulf of
Mexico jackup market.
Oil companies may increase their drilling budgets over the next few
years due to lease expirations. During 1999 there will be 299 leases
that will expire if not drilled. (See chart at top of newsletter for
lease expiration breakdown). Every one of these leases required bonus
payments from oil companies -- many costing several million dollars.
And if the company does not drill before the expiration date, they
lose the lease. I can't imagine paying all that money and not taking
a look at the bottom of the hole.
Rowan has always searched for niche markets which we can penetrate and
ultimately dominate. In the late 1970's and early 1980's, we could
see an oversupply of conventional jackups. Oil companies were
starting to look for oil and gas in harsh environment areas which
required rigs yet unbuilt.
We believe offshore Eastern Canada holds great promise. Mobil, Pan
Canadian and Petro Canada have made substantial discoveries and have
contracted to sell gas to the Northeastern part of the United States
as early as 2000. Eastern Canada requires harsh environment rigs.
Rowan has two of its GORILLAs working for Pan Canadian and Mobil.
GORILLA II is on a two-year contract with Mobil, working in their
Venture field at a day rate in excess of USD 100,000. GORILLA III is
on its last year of a seven year contract. The bad news is that our
day rate fluctuates with oil prices. With low oil prices, the day
rate works out to be about USD 100,000 UNDER market rates, but is
still profitable. The good news is we will finish this project in the
3rd or 4th quarter and be able to renegotiate at (higher) market
rates.
In the North Sea, Rowan has six jackups. This market has softened
somewhat from just a year ago standard jackups were pushing USD
100,000 a day. Five of our six jackups are presently under contract.
On an interesting note, the Department of Trade and Industry in the
United Kingdom is taking a dim view of oil companies not living up to
their commitments to drill and produce marginal fields in the North
Sea as a result of low oil prices.
Rowan's manufacturing division, LeTourneau, has generated USD 666
million in revenue with over USD 69 million in profit during the five
years since Rowan bought the company for USD 52 million. But the real
strategic advantage is yet to be seen. And that is building a new
fleet of offshore jackups which will take Rowan into the next
millennium and confirm Rowan's dominant position as the premier harsh
environment jackup company in the world.
Now, Mr. Bob Palmer, Rowan Chairman, CEO and President:
During a previous collapse of Rowan's stock price, the hot stock was
an IPO called Boston Chicken. We needed to do something to create
interest in our stock. I suggested that we change the name of Rowan
to Rowan Chicken, or at least to Boston Drilling Company. Well, it
sounded good at the time.
But then times changed, and for a few years Rowan's drilling division
enjoyed a place in the sun as the stock rose from less than $5 a share
to over $40 per share. But that was about 15 months ago -- the world
has changed and our stock is now less than $9 a share.
The Big Question is Why? And is there a Game Plan?
Why? -- "It's the price of oil." (Ed. Note: ODB readers -- Have you
heard this before?)
If you are serious about understanding the seemingly irrational
fluctuations of the price of oil and gas, I believe there are three
books that are a "must read".
First, of course, is Daniel Yergin's excellent book The Prize: The
Epic Quest for Oil, Money and Power.
(Note: Follow the link below for more information on "The Prize".)
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Second, is Peter Schweizer's carefully documented story of the Reagen
administration's secret strategies that hastened the collapse of the
Soviet Union. The name of the book is Victory. A key strategy was to
drive down the Soviet hard currency earnings through the collapse of
oil and gas prices -- and it worked.
(Note: Follow the link below for more information on "Victory".)
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And finally, A World Transformed by George Bush and Brent Scrowcroft.
(Note: Follow the link below for more information on "A World
Transformed".)
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After reading these books it is easy to understand why oil and gas
prices are once again collapsing. The simple fact is -- It is in the
best interest of the current U.S. government administration.
Low energy prices accomplish two things. They artificially boost the
economy -- since most businesses and voters are energy consumers --
and low prices harm most of those countries who are, or could be,
considered adversaries of the United States.
The total amount of surplus production, worldwide, is about 2.0
million barrels. Iraq is responsible for the entire amount. The
United States is bombing useless targets in Iraq on a weekly basis,
but the message from the Administration is -- "keep oil prices
depressed, or else."
There is only one conclusion for those that are committed to remain in
a business that depends on the continued exploration for additional
supplies of oil and gas. The deck is stacked against us. It is a
crooked game, but it is the only one in town.
Rowan's strategy deals with the volatile market cycles. It has worked
for over 75 years, and I believe it will continue to provide for long
term survival of the firm and deliver value for our investors. We
call the strategy manpower, Machines and Money -- and their importance
is ranked in that order.
First is Manpower. Rowan was founded on the principal that in any
organizational endeavor, men are more important that machines and
tools.
Rowan's Machines, at least in the drilling division, are unique.
While it is true that many of our competitors own LeTourneau jackups,
the rigs they own were designed over twenty years ago, and they are
obsolete by today's standards.
The three original Rowan GORILLA Class rigs, designed in 1981 and
delivered between 1983 and 1986, are even today unique in their
capabilities. The new Super Gorilla design, the first of which is now
in the North Sea, has no equal. We believe we are at least five years
ahead of any possible competition -- particularly since we own the
design and the manufacturer.
Rowan has been committed to the GORILLA rig concept for the past 18
years, and today the majority of our investment in drilling rigs is in
these four rigs, with two more to be delivered over the newt 30
months.
Money. We are in reasonably good shape. 1999 earnings from the four
GORILLA class rigs should be in the range of $60 million or more than
75 cents per share.
The Aviation Division and the Manufacturing Division should be earn
enough to offset the possible earnings shortfall of the 14 rigs in the
Gulf of Mexico. Thus, 1999 earnings, plus depreciation, should exceed
$100 million. The balance sheet is in good shape -- no financing
required.
So the near term strategy is to "hang in there" while preparing for
the next "boom" -- which will happen at some future date. Rowan will
be ready, because we have stayed ready. And I believe this strategy
will deliver more shareholder value than to change the company's name
to Rowan.com!
As we stare in disbelief at the decline in Rowan stock price, I remind
you of my comments with the third quarter 1997 earnings release --
back when the stock was $44 a share. "History tells us this state of
euphoria will not last". Well, it didn't.
I will concede the correctness of Wall Street's track record of the
past. But it is possible that Rowan's future is not as bleak as the
current stock price would indicate. |
