Offshore Drilling Bits
April 24, 1999
Number 37
Written by: Mike Simmons, Offshore Rig Broker and Consultant
mailto:mike@simmons.net
atoffshore.com Companion ODB web site.
A RIG COMES IN FROM THE COLD
Offshore Rig Use Up, Land Rig Count Down
The number of rigs under contract in the U.S. Gulf of Mexico
increased by five this week with the utilization rate rising
to 63.9% from 61.1% the previous week.
Land rigs are still seeking a bottom, falling by 10 rigs
this week to 488 U.S. rig working.
Remember the talk from drilling contractors about how
certain rigs were going to be "cold stacked" due to lack of
work? (Cold stacking is said to be when the rig is taken
off the market and the crew is either let go or reassigned
and the rig is not bid on jobs.)
Anybody with more than a week in the industry knows that a
drilling contractor will yank a rig out of cold storage in
the amount of time between breaths if there is work for the
rig. So while cold stacking sounds like drillers are trying
to reduce supply in the market, it is more a "state of
readiness" indication -- maybe it takes a week to get her
ready for work rather than 24 hours.
In the depressed drilling days of the mid 1980's, some rigs
were cold stacked to the point of totally shutting down,
including elaborate and extensive programs to preserve the
engines and other equipment, and dehumidfy the interiors and
spaces to control corrosion. When a rig was cold stacked in
such a manner, it was REALLY stacked and wouldn't be showing
up for a 60-day job.
This week, it is reported that R&B Falcon (FLC) jackup
CLIFFS 155 will be brought out of cold stack for a 60-day
plus options contract with LLOG Exploration. Drilling in
Main Pass Block 47 is expected to begin this weekend.
How did this rig even get bid if it was cold stacked?
Maybe it was just in the cooler and not on ice.
Whatever the definitions may be, it's good to see a rig
going from idle status to working status.
Web site: R&B Falcon rbfalcon.com
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THE MALL WILL CLOSE IN FIFTEEN MINUTES...
Overheard on the way out the door:
"Oh, you didn't pick up that offshore drilling contractor
you were looking for? I'm sorry Mr. Tisch, but the Bottom
of the Cycle shopping mall is closing now. Maybe you can
come back when we reopen again for the next oil patch
debacle."
The plan was a good one.
Don't build expensive new rigs. Conserve cash. Don't pile
on debt. Wait for the cycle to swing low. Then pounce on
the underpriced, weakened and vulnerable competition in the
name of consolidation. Deep value shopping at its best!
That would be a solid plan, and it's the one that many
people thought Tisch's Diamond Offshore had been plotting.
But those pesky oil prices didn't stay down quite long
enough to build despair and a critical level of weakness
among the competition.
Now the oil patch world is starting to bask in the optimism
and expected future benefits of oil prices at $18-plus. It
would seem there are no eager or willing or needy sellers of
companies. No forced sales. And no defaults. In short, the
future looks too good to sell.
However, don't forget that day rates continue to be
depressed. Transocean talked this week about not working
rigs at below direct operating costs. Translated, that
means a company is being paid enough to pay the "out of
pocket" expenses to run the rig every day, but no money left
over to send to the profit line.
How long can a driller not be paid above direct operating
cost and still be in business? I suspect that Diamond can
outlast most any driller in that contest by a country mile
due to its conservative fiscal management during the boom.
Optimism over higher oil prices is great, but there is no
place in the pro forma spreadsheet for such an item. And
Diamond can "not make money" longer than most of it's
competition.
So if you see Mr. Tisch sitting out in the parking lot of
the mall, he may just be waiting for the doors to open for
the clearance sale of the season (cycle).
Web site: Diamond Offshore: No known website.
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IPAA Supply and Demand Committee Forecasts
Domestic crude oil production will continue its current
downward trend in 1999 and 2000, according to the
Independent Petroleum Assoc. of America. The short-term
(1999-2000) forecast projected a 7.8 percent decline in
crude oil production in 1999, to 5.75 million barrels a day,
and a further 1.7 percent decline in 2000. This would
represent the lowest domestic output in more than 50 years.
"The production lost will not bounce back quickly."
The Supply and Demand Committee forecast also said:
* A strong economy and normal weather are expected to drive
total U.S. energy consumption to 92.89 quadrillion BTUs
(quads) in 1999, an increase of 2.8 percent, and to 94.20
quads in 2000, a jump of 1.4 percent.
* Total domestic demand for petroleum products will increase
by 1.9 percent in 1999, with economic growth offsetting the
negative effects of the past year's weather. A further
increase of 1.7 percent is expected in 2000.
* Natural gas consumption in 1999 will increase 3.2 percent
to 21.97 Tcf. Consumption in the residential and commercial
sectors will show the most growth with increases of 6.7
percent and 5.5 percent respectively. Demand growth will
continue into 2000, with a 2.1 percent increase expected.
* Oil imports will increase 3.1 percent in 1999 and 3.2
percent in 2000. Imports are expected to make up over 57
percent of total petroleum demand in 2000.
* After growing at double-digit rates annually between 1986
and 1995, total gas imports will increase by 2.7 percent in
1999 and 4.8 percent in 2000, to 3.4 Tcf.
Web site: ipaa.org
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THE FIRST ONE NOW SHALL LATER BE LAST -- Bob Dylan
The times they are a-changing for the companies that build
and equip offshore drilling rigs. Once the leaders of the
oil service sector, they are now the laggards.
Take for example Varco (VRC) and Friede Goldman (FGI) -- the
two are name-brand, top-quality, best-of-the-best. The
stock of both companies led the pack in the heady days of
1997, and even during the subsequent "false rallies". But
those days are gone as the market has turned over the
leadership crown to others in the sector.
The street doesn't perceive the business of constructing and
equipping rigs as being the best business to be in at this
point in the cycle.
And who can argue?
Varco said, "Incoming orders have fallen sharply.
Year-to-year decline in orders is attributable to the
cessation of new commitments to build offshore rigs.
Backlog at March 31, 1999 was $272.1 million, as compared to
$599.7 million one year ago, and $367.4 million at December
31, 1998. Most of the backlog is scheduled for delivery
during the remainder of 1999, and as a result, the full
impact of the current industry slowdown on Varco's Revenues
is not expected to occur until late 1999 or early 2000."
Friede Goldman is expected to report earnings April 26 and
will likely have a similar story to tell, although the
recent order of a new semisubmersible will prop up FGI's
backlog for more months than Varco. But the bottom line for
both companies, and other companies that depend on rig
construction for revenue, is: Work going out the back door
and no work coming in the front door. After a while that
leaves nothing between the doors but empty space.
ODB "old hands" know FGI has long been one of my favorite
companies. Pick up the company's recently published 1998
Annual Report and you will see me quoted as saying, "FGI
has become the 'go-to-yard' due to reliability and quality
of work. The company (FGI) has proven itself as being
reliable, on time, on budget, and customer oriented....
Future customers will be able to place work at FGI with
confidence. This alone will be a strong factor in favor of
FGI's getting more than its share of future rig work."
But even the best company can not create work from thin air.
(Unless they have the help of a good offshore rig broker!)
It would take quite a creative thinker to weave a scenario
calling for the construction of new offshore drilling rigs
before 2002-ish. Consider that even in the boom days of
1997, the economics of offshore drilling were not sufficient
to stimulate the construction of but a few jackups.
If jackups aren't built by drillers during those heady days,
then what kind of monster market WILL it take for new
jackups to be built?
Floaters? The world is awash in capacity, and more is
coming as rigs ordered come to delivery. There is a
reasonable scenario that calls for more floater demand as
discoveries are made and more rigs are needed for
development drilling. But that demand is at least a couple
of years away, and don't expect oil companies to be plunking
down five-year, $300 million commitments too quickly.
Hopefully, repair jobs, refurbishments, upgrades and other
rig work will keep companies like FGI and VRC busy until rig
construction becomes en vogue once again.
Web sites: Varco varco.com
Friede Goldman fng.com
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IS IT TRUE?
A local Brazilian publication, Gazeta Mercantil, reported
Petrobras has signed a deal with Rio de Janeiro-based
Estaleiro Maua Shipyard for the construction of two
semisubmersibles. The two rig deal is thought to be worth
$400 million and calls for delivery in 24 months.
This report is starting to be picked up by others as fact,
but I am not so sure. Details from the original report are
sketchy at best.
It is known on the streets of Houston that there have been
talks, and a certain amount of interest, in building two
such rigs as reported by Gazeta Mercantil, but it is
doubtful an actual contract has been signed. It often
happens that reports of a deal being made are based on
something less than an actual contract. That may be the
case here.
But in case you hear the report of "new rigs being built",
consider yourself informed.
Background
These two rigs are likely Amethyst rigs numbers II and III
and would not represent "new" rig orders. If you recall, of
the six Amethyst rigs, two were to have been built at Davie
Shipyard in Canada, two at TDI-Halter (HLX) and two at
Daewoo in S. Korea.
The Davie yard went under and the two rigs to be built there
became "floaters" without a construction yard. Both Daewoo
and Halter wanted to build one or two of the orphaned rigs.
Word on the street was that FGI wasn't terribly interested
because the expected construction price was too low, and FGI
didn't think the rigs were buildable at the prices quoted by
other yards.
Brazil is interested in reviving its shipyard capacity in
anticipation of the high level of exploration and production
activity forecast for the area. The placement of these rig
orders, if such an order would come to pass, may be a good
start to achieving that goal. The Petrodrill/Maritima
partnership, owned 30% by Pride International (PDE), has had
a tough time getting financing on the six Amethyst rigs, and
all six rigs are significantly behind the original
construction/delivery schedule.
Building the rigs in Brazil may help solve the financing
problems since it is likely some sort of loan assistance
from the government would be included in a rig construction
package.
Industry observers have expressed concerns over quality,
timeliness and cost overruns that may occur by building rigs
in this Brazilian yard as opposed to a more established and
experienced facility.
If it turns out the new order is in fact for the Amethyst II
and III, this development may bring more clarity to the
dealings between Petrodrill and Ocean Rig (OCR, Oslo
Exchange). Petrodrill has been considering chartering in
Ocean Rig's two BINGO 9000 semis now under completion at FGI
to use for Petrobras work.
This story will be updated in the next issue of ODB.
Web sites: Halter Marine Grp. haltermarine.com
Ocean Rig ASA ocean-rig.com
Pride Intl.: No known website.
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Did you know...?
The World's Ten Largest Oil Companies
(Billions of Barrels of Oil Reserves)
1. Saudi Arabian Oil Co. 259
2. Iraq National Oil Co. 113
3. Kuwait Petroleum Corp. 94
4. Abu Dhabi Nat'l. Oil Co. 92
5. National Iranian Oil Co. 90
6. Petroleos de Venezuela 72
7. Petroleos Mexicanos 42
8. National Oil Co. (Libya) 30
9. Top Ten US-based Companies 29
10. China Nat'l. Petr. Corp. 24
Source: Oil & Gas Journal
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OIL SERVICE STOCKS -- SECTOR FOCUS
Rowan Companies, Inc. (RDC) 14 7/16 – During the week we saw
that RDC was sitting at recent resistance and we looked for
a continued move up on Friday. We got the move, but it was
slight (2 teenies) and didn't last long as it was pulled
down by general energy sector weakness. There is resistance
left over from November at the 16 level. A move over 16 in
combination with some news from the sector is buyable.
Support is at about 12 3/4. Optionable. Web site: None known
Baker Hughes, Inc. (BHI) 27 5/8 – BHI was hammered on
Friday, but showed some strength in closing well off its
lows of the day. The selling came on declining volume, and
if we remember that volume confirms a trend we realize that
this ain't no trend. BHI spent the week building a base
after the prior week's run-up and a few people decided to
pocket some of the winnings before the weekend. An astute
trader may be able to play for a couple of points on sector
strength, but there is resistance at around 30 1/2 (but not
again until the 37 level.)
Support is firm at its 22-dma of just above 25, but recent
support is decent at its present level. Optionable.
Web site: bakerhughes.com
Halliburton (HAL) 41 3/16 – HAL reports earnings on Monday
and they will be only a fraction of year ago. Remember that
VRI blew out earnings, RIG beat the street by 0.12, and GLM
beat earnings by 0.02. RDC missed miserably. We can't find a
whisper on HAL, but if they manage to do some upside damage
to the consensus they may pop for a point or two. Watch for
the announcement and see where the market is before taking a
position in HAL. Remember that even great earnings don't
occur in a vacuum – what's happening in the sector and the
market overall will influence the street's reaction to HAL's
earnings.
Support/Resistance = 35/46. Optionable.
Web site: halliburton.com
Superior Energy (SESI) 4 3/16 – SESI showed strength with
the rest of the energy sector when the cyclicals came back
into play, then traded flat with the sector most of last
week, but when everyone else hit rough water Friday, SESI
forged ahead on merger news. The street viewed the
definitive agreement to acquire Cardinal Holding Corp., a
provider of liftboat rentals and well servicing activities
for major and independent Gulf of Mexico oil/gas companies,
as positive. Volume Friday was nearly three times normal and
SESI closed at its high of the day – a bullish sign. We'll
wait to see if SESI can clear resistance from back in
November at about 4 1/2. Support is light at 3 3/4.
Web site: superiorenergy.com
NOTE: Oil stocks will likely react in sympathy to HAL's
earnings Monday. If HAL blows out earnings the sector may
show renewed strength for the short term.
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Closing Note.
According to Dreman Value Management LLC, the large online
auction house eBay Inc. is worth just $6 a share compared
with its current price of $200, which has been inflated by
optimistic expectations of the company's future earnings.
eBay has an incredible forward-looking price/earnings ratio
of 8,600.
What will happen when the "bubble" vaporizes?
The third tier of Internets will become virtually worthless.
"That group, which is the vast majority of the Internet
companies, will be consolidated and eaten up by the
secondary stocks and blue-chip names, and they will
essentially disappear."
On that day, your once-rich-now-broke brother-in-law will
finally quit thinking he is a Wall Street wiz, and you will
look pretty smart owning The Drillers.
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