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Evidence mounts Indicators favor drillers, service firms: U.S rig count expected to jump 12% Petroleum News
Drillers and others in the oilfield services business are looking even more confident than a few weeks ago about their future, as are industry analysts who cover the sector.
“Given our constructive view of the macro energy outlook, we believe there is a growing likelihood of a sustainable increase in drilling activity over the next several years,” concluded investment bank Simmons & Co.
Gene Isenberg, chairman and chief executive officer of Nabors Industries, also was upbeat coming off a successful 2003 drilling season. “Looking forward, we expect every one of our businesses to achieve higher results in the first quarter of 2004,” he said.
Doug Rock, chairman and chief executive officer of oilfield service company Smith International, said 2003 provided a foundation for a new up cycle for Smith. “We’re optimistic about our prospects for 2004 with the global economic recovery providing a backdrop for longer-term sustainable growth in the oil service market,” he added. Rowan Companies and BJ Services, the first major contract driller and oilfield services company to report 2003 fourth-quarter earnings two weeks ago, dropped a strong hint then business was going to improve following a couple of challenging years for industry. E&P companies need to be willing to spend Drillers and service companies depend almost entirely on the financial health of exploration and production companies and their willingness to spend. However, despite last year’s high commodity price environment, so-called E&P companies were cautious on the drilling front, opting to exercise capital discipline by using excess cash for such things as paying down debt, buying back shares of their own company and making property acquisitions that generally bring proved reserves.
But E&Ps have entered the new year with cleansed balance sheets and should “witness commendable” increases in drilling activity over the next two or three years, Simmons said in a report to investors. Simmons is forecasting a U.S. drilling rig count of 1,151 in 2004, 12 percent higher than the 2003 average of 1,031. Internationally, the rig count is projected to expand 6 percent to 821, while the offshore rig count alone could increase by 12 percent, led by a recovery in activity in West Africa.
Nevertheless, because E&Ps apparently “have awakened to the virtues of capital discipline, we expect excessive conservatism and adherence to capital discipline to continue,” Simmons said, adding that it does not believe industry “will revisit the halcyon days” of 1995 to 1997, and “especially” 2000 when U.S. drilling activity swelled by 48 percent.
Over the next two years, Simmons said it expects compound annual earnings growth of about 20 percent to 30 percent for service companies and 30 percent to 40 percent for contract drillers — “not bad, but not explosive relative to oil service standards of recent past cycles.” Nabors, Smith both report growth Nabors, which owns and operates about 600 land rigs and 950 land workover and well-servicing rigs worldwide, reported 2003 fourth-quarter net income of $64.9 million or 42 cents per share, compared to net income of $50.3 million or 33 cents per share in the 2003 third quarter and $27.2 million or 18 cents per share for the same period a year earlier.
“All of this continues to reinforce our conviction that we can sustain robust growth in our results for the next several years,” Isenberg said of the company’s financial performance. “In 2004, we expect to see a continuation of the magnitude of growth in earnings per share that we saw in 2003, even in the face of a much higher tax rate.”
Smith, a leading worldwide supplier of products and services to industry, posted net income for the 2003 fourth quarter of $38 million or 41 cents per share. Because of significant growth in Western Hemisphere drilling activity, results were more than double the $17.7 million or 18 cents per share reported for the same period a year earlier. Compared to the 2003 third quarter, revenues grew 6 percent while earnings improved 6 cents, or 17 percent, after excluding the impact of charges.
“Although we are pleased with the strong earnings performance, we’re equally impressed with the level of cash flow we’ve been able to generate so far this cycle,” said Loren Carroll, Nabors’ executive vice president.
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