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Oilfield service sector’s earnings lag Earnings expected to be flat to down as service companies await windfall from surging exploration and production profits Petroleum News Houston Staff
A huge chasm has opened between U.S.-based oilfield service companies and the exploration and production spending on which they depend, according to projected 2003 first quarter earnings for both groups.
The run-up in commodity prices during the first quarter could boost profits for exploration and production companies more than 80 percent from the prior quarter, up from an estimated 60 percent increase just a few weeks ago. Companies are to begin reporting the week of April 20.
However, not much of the windfall seems to be filtering down the food chain. Investment bank Salomon Smith Barney said it expects two-thirds of the service companies it covers to report flat to reduced earnings compared to the previous quarter.
“Most companies should report negative sequential comparisons, following a series of mostly negative estimate revisions,” the firm concluded in a report to investors.
Commodity prices reached extraordinary heights during the first quarter. NYMEX Henry Hub prices for natural gas averaged $6.58 per million cubic feet, versus $4.07 in the prior quarter and $2.54 in first quarter 2002. West Texas Intermediate crude prices followed a similar path, rising on average to $33.97 per barrel, compared to $28.24 in the prior quarter and $21.57 in the year-ago period. Producers hedge on spending Analysts note that exploration and production companies, because of economic uncertainties and a lack of viable prospects, have been using their cash reserves primarily to pay down debt, buy back company shares and invest in relatively safe mergers and acquisitions.
Nevertheless, service companies exposed to North American land drilling during the first quarter, such as Nabors Industries, BJ Services and Patterson-UTI, should show improvements over the prior quarter.
Helped by surging commodity prices and seasonal trends, U.S. and Canadian land drilling combined increased by 23 percent quarter-over-quarter. Canadian drilling was especially strong, up 74 percent sequentially and up 30 percent from first quarter 2002. U.S. land rig counts rose 6 percent sequentially and 10 percent from the year-over-year quarter. Still, U.S. natural gas production fell 3 to 5 percent last year and is expected to trail demand by 3-to-1 this year.
One of the problems is the Gulf of Mexico. The offshore rig count during this year’s first quarter fell by 2 percent compared to the prior quarter and by 10 percent compared to the same period last year.
Additionally, the international drilling environment was lackluster, down by 2 percent quarter-over-quarter and up just 2 percent year-over-year. Activity was particularly slow in Latin America, the North Sea and West Africa.
Nigeria uncertainty Overseas, industry analysts seem to be particularly concerned about Nigeria, where increased civil unrest over the past few weeks forced Shell, ChevronTexaco and TotalFinaElf to shut in a cumulative 850,000 barrels per day, or 38 percent of the nation’s total daily production.
Salomon Smith Barney estimates that while 3 to 5 percent of worldwide exploration and production spending occurs in Nigeria, only 1 percent of worldwide rigs is located in the region. However, service revenues are among the most concentrated of any geographic market, particularly offshore.Prolonged unrest could seriously disrupt service companies operating in Nigeria, particularly Noble, GlobalSantaFe and Schlumberger, Halliburton, Smith International and Baker Hughes. Already, two jackup rigs have been evacuated.
And offshore production is processed through onshore facilities where violent confrontations between Ijaw militants and Nigerian soldiers continue, creating more uncertainty.
Because of weaker activity than expected in offshore and international drilling in the first quarter, per-share earnings for service companies with exposure to these sectors are expected to decline 16 percent from the prior quarter and 21 percent from the year-ago period. For offshore drillers alone, per-share earnings are expected to fall 26 percent sequentially and 35 percent year-over-year.
However, it generally takes time for exploration and production spending to make its way to the service sector. Despite last quarter’s weak drilling environment outside onshore United States, Salomon Smith Barney expects full-year per-share earnings for service companies to rise about 14 percent on the average.
“In our view, the first quarter will represent the earnings trough for most service and drilling companies,” the firm said.
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