Offshore Drill Bits, Part 1
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This edition of Offshore Drilling Bits is delivered in two parts. The
second part consists entirely of a recent speech presented by Matt
Simmons to the National Ocean Industries Association. While lengthy,
I think you will agree there is plenty of "food for thought". I met
with Matt a few weeks ago and can report that he never ceases to take
a fresh and original view of the oil patch and its driving forces. He
pulls the sheets back and tells you what he sees, for better or worse.
My thanks to Matt for allowing me to send you his remarks. (see
following email) If you have comments or questions for Matt, please
send them to me and I will see that he gets them.
***************************************************************
...NOW DOWN TO BUSINESS
In the last issue of ODB, published March 26, I commented that it
would tough for the oil service sector to duplicate March's gains in
April. And tough has been the operative word!
True to form, the prices of sector stocks have been anything but
predictable. The "big boys" can't seem to decide if the water is warm
enough for swimmin' just yet. They dip a toe in now and then, but
don't stay long.
As I expected, the giddy atmosphere leading up to OPEC's March 23rd
production cut formalization, did not extend into April. The
attention may be turning to fundamentals. If so, batten the hatches
'cause the fundamentals have yet to be told about OPEC's cuts.
Gulf of Mexico rig utilization fell again this past week with three
additional rigs added to the "without contract" column -- lowering the
rate to a pathetic 59.4%. (A year ago, the Gulf of Mexico utilization
rate was 96.6% with only six rigs not contracted.)
There are currently 180 mobile offshore drilling rigs in the U.S. Gulf
of Mexico. And that is soon to rise with at least two more idle rigs
expected to take residence in the Gulf during April.
Well permits filed with the Minerals Management Service confirm this
year's drilling slump. To date this year there have been 152 permits
filed versus 257 for the same year ago period.
Land drilling rig use dropped another notch, it's eighth record low
out of the last 12 weeks, moving to 498 rigs drilling in the U.S.
(The peak was in December 1981 when 4,530 rigs were working.)
Since a good portion of oil service company revenues begin with
drilling activity, it is easy to see why the stocks have had such
erratic behaviors. The market "players" are the ones moving the
stocks up and down. The "investors" are still on the sidelines
seeking comfort from the storm.
What will it take for the investors to jump in? Fundamentals. Plain
and simple. The oil price news is about as good as it can get, for
today. The first peek at OPEC cheating levels can formally be
expected May 10, but will likely be the subject of much rumor and
speculation about two weeks prior. Light cheating will be a big
boost, even if a temporary one. Heavy cheating takes stocks on a
submarine cruise.
Aren't there ANY signs of fundamental improvements? I was told by two
drilling contractors they have seen a "pick up" in bid request
activity. You have to bid 'em before you can work 'em, so this isgood news.
Here are some other "good signs".
>>>> Asian influences on the market may be helping. The Japanese
Trade Ministry reported this week that February gasoline demand was up
4.3% over the same period last year -- the sixth straight month of
increases over year-ago periods.
>>>> South Korea's energy consumption rose 11.8 percent in February
from a year earlier, providing further evidence the country is
emerging from its worst recession in 45 years. The increased energy
use by factories resulted in oil refiners' output rising 31.4 percent
in February from a year earlier and 6.5 percent from January thisyear.
>>>> World crude oil demand is expected to continue to increase this
year while global oil production retreats, reducing much of the excess
oil in storage, according to the U.S. Department of Energy.
>>> In its updated short-term energy forecast, the DOE said world
demand for crude oil this year should exceed supply by 1.2 million
barrels per day. Due to recent output cuts announced by major oil
producing nations, the DOE is forecasting 1999 global oil demand at
75.1 million bpd and crude supply at 73.9 million bpd.
''When we see those inventories shrink, we're going to need thatoil,'' said Bill
O'Grady, vice president, at A.G. Edwards & Sons, as reported byBloomberg.
You can bet on it, Bill.
Investors expecting to see knee jerk improvements in offshore activity
are going to be disappointed. It won't happen that way. As those
market players abandon the sector, and as fundamental improvements
start ticking in, the sector will start moving higher -- likely
substantially higher.
While it looks like "the bottom" is firmly placed for stock prices,
don't be surprised to see your favorite sector stock come back for a
rest now and then.It's a cycle. Ride it, don't fight it.
*************************************************R&B FALCON LOSES LEADER
Or did they?
The news of Steve Webster stepping down as FLC President and CEO came
as a surprise all across the oil patch. The internet boards were
awash with speculation about bad blood between Webster and Paul Loyd,
FLC's Chairman. "A company can only have one leader", some said.
What those folks may not know is that Messrs. Webster and Loyd go back
a long way before R&B Falcon was a household name. In the early
1980's the two were in business under the name of Jones, Loyd and
Webster -- a financial "wheeling and dealing" partnership involved in
the offshore oil business. These men are partners, not "enemies" --
and have been for many years.
Here is what one "inside-the-industry" subscriber wrote to me:
"I figure Steven Webster had another deal or RB needed a scape goat
before they go bankrupt. Smoke and mirrors, he stays on the Board and
gets paid as a consultant. Give me a break. Time will tell."
There surely does appear to more to this story than meets the
immediate eye. I expect over the next few weeks we will be hearing
the next chapter.Does Mr. Webster join another driller or service company as a
"placeholder" before the company joins with FLC? Stranger things havehappened.
Stay tuned to this one. It ain't over.
************************************************SHELLING OUT BIG BUCKS
Business for HLX?
Shell Offshore confirmed its planned development of the Brutus field
in Green Canyon Block 158. The oil company plans to build a
tension-leg platform (TLP) for installation in 2,985-ft. water in
mid-2001, with first production slated for later that year.
Total project cost is estimated at $900 million, including pipelines.
Shell has not yet awarded any contracts for construction of the TLP's
major components. However, being Shell's fifth TLP in the Gulf of
Mexico, they expect to capitalize on its knowledge from previous TLP
construction efforts and utilize options from a catalog of
standardized products it has developed.
One of the usual participants in Shell's TLP projects, Italy's
Belleli, once again is expected to play a role. A consortium of TDI
Halter, ABB and Belleli expects to complete a deal this week to lease
Belleli's fabrication yard in Tarranto, Italy. The companies would
have an option to buy the facility. The yard is bidding on several
TLP fabrication projects including the Brutus TLP for the Gulf ofMexico.
********************************************AN INVESTOR WITH A VIEW...
I came to the conclusion a while back that the way energy E & P
companies do business benefits corporate insiders and Wall Street deal
makers, but long term investors are not going to do well, generallyspeaking.
What I see over and over in the independents is a huge amount of
borrowing for exploration, followed by glowing reports about expanded
reserves and production, followed by impairments and write downs when
the inevitable downturns come. As is seen in several instances today,
investors are left with stock in a debt ridden, near bankrupt concern,
or at best a company whose stock price is at a very low level.
This seems somewhat incredible to me, in view of the fact that there
is such a huge and growing market for energy. There has to be a better
way to this industry to operate, I'm just not smart enough to know
what it is. -- WilliamJH, Silicon Investor message board.
*********************************************LAST CHANCE -- LAST DANCE
The World According To Slider
One last bite at the apple? Entering the sweet spot?
Last chance - last dance? Cheap (as in inexpensive) date -- FLC?
Have we learned yet another lesson in the Oilpatch? This time that
The Street will only look so far forward? Or, for those who have
traded the now FIVE cycles in seven months of OSX 45-72 -- is this oldnews?
Crude rises 40%, and even with a bit of retracement, is still $1-2
above virtually all of the optimistic forecasts of mere months ago.
Mere months ago nearly all of the Oilpatch would have loved to have
locked in $15 Oil for 1999. And here we find ourselves at $16 and
have been rewarded with a 20%+ retracement in the OSX off the highs.
Are we headed for another major selloff back to OSX 45-50ish along
with new lows, or are we in merely a normal retracement and
experiencing profit taking prior to the upcoming earnings reportingperiod ?
I think the latter. The fifth OSX trading cycle, and its almost
predictable trading range of late, has not gone un-noticed by the
Street. With another surge in the overall market, especially in tech
and internet stocks, the issue of dead money has once again come intoplay.
It is hardly a secret that the OSX stocks will not see ''any''
financial benefit from the surge in oil prices for months to come. Oil
companies are waiting to see OPEC's degree of compliance and the
stability of crude prices, before unleashing cap ex spending.
Given this gap in time until these stocks actually realize any
financial (fundamental) benefits and given the upcoming earnings
reporting period, which precedes OPEC's initial compliance numbers for
the new production cuts; it should not come as any surprise that the
OSX endures a strong retracement. Only the degree of the retracement
remains unanswered.
However, does the darkness not always precede the light? Are we
getting another bite at the apple, the last bite? Perhaps. If nothing
else; we are being presented with perhaps the best risk vs. reward
opportunity of late, especially when measured against a timelinessfactor.
If indeed, The Street wants a ''sure thing bet'' prior to re-entering
the OSX for more than a brief visit, then this earnings reporting
period and the initial OPEC compliance reporting hold the key to
closing the door on an ugly chapter in OSX history.
By any measure, this upcoming cycle potentially looks to perhaps be
the one that sticks. Pending no sector-wide, unforeseen, negatives and
the expected positive compliance from OPEC; we may just be poised in
the "sweet spot" for the first solid leg of recovery.
The primary bet remains on OPEC's compliance. OPEC has its total
credibility and perhaps even its existence riding on the initial
compliance numbers. Any failure by OPEC here will be fatalistic. Too
much is riding on these initial reporting periods for common sense not
to dictate a high probability of strong compliance. While this still
remains a "bet" on OPEC, the odds of compliance have never beenbetter.
Every investor must select the individual stocks and subsectors within
the Oilpatch that they feel comfortable with -- drillers, fab
companies, the marine industry, service companies, independent E&P's,
gas vs. oil, integrateds, or the majors themselves. The Street has
already shown us -- not once, not twice, but actually FIVE times in
seven months where they will value the various companies in an
uncertain marketplace.
Should we hobble through this upcoming earnings period without any
major surprises and if OPEC complies with production cuts; we may
finally emerge from the "uncertainty" to an actual bullish recovery
period. With the prior resistance of OSX 72ish of late, a new target
of OSX 85 or to even 100 is not unrealistic -- especially since the
last time we had $17 Oil, we had OSX 104.
Only time will tell if this is the real deal. The good news is the
wait will not be a long one. Earnings reporting starts this coming
week and the initial OPEC compliance numbers will soon follow. Given
the positive news coming out of Asia, averaging back into this
selloff -- for those who have been playing the trading range game --
looks to be potentially, perhaps the last "sweet spot" bite at the OSXapple.
All we need is for OPEC to do the right thing. The bet is just that
simple. The Street is waiting to see what OPEC does, as well as the
Crude Oil Traders and the Major Oil companies. OPEC has the keys to
not only the "vault", but to the cap ex spending of the Oil majors and
correspondingly the stock prices of the Oilpatch.
The "bet" has never looked better to me.
*****************************************************************
Offshore Drilling Bits is written by Mike Simmons.
Comments and questions to Mike at mailto:mike@simmons.net
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