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Drillers Say Offshore Outlook is Positive
Source: Houston Chronicle
Publication date: 2008-10-24


Oct. 24--The long-term outlook for offshore oil and gas drilling remains strong despite the recent meltdown in the financial and commodity markets, three major offshore drillers said Thursday after reporting improved third-quarter earnings.

And economic headwinds may force some less-established drillers out of business, creating opportunities for major players to scoop up rigs on the cheap.

But rig companies are also girding for what they say could be a more challenging environment in coming months.

"I don't know that we have seen the impacts of oil below $65 yet," said Larry Dickerson, chief executive of Houston's Diamond Offshore, in a conference call discussing the company's quarterly financial results.

The word of caution comes after a free fall in the price of crude that has prompted some oil companies to cut planned spending on drilling programs in 2009. It also underscores the abrupt change that has taken place in an industry that in the third quarter was still riding high, as earnings reports in recent days have made clear.

Oil hit a record close of $145.29 per barrel during the quarter, and is now trading at less than half that July peak. Sweet, light crude for November delivery closed up $1.09 at $67.84 a barrel in trading Thursday on the New York Mercantile Exchange.

On Thursday, Diamond Offshore said third-quarter profits spiked 51 percent to $310.7 million, while Dallas-based offshore driller Ensco International said profits rose 5.8 percent to $282.3 million. Noble Corp., a Sugar Land-based drilling contractor, reported on Wednesday that its third-quarter earnings jumped 20 percent to $382.5 million.

The stock prices of all three companies rose Thursday on the news.

The profit gains came despite losses from hurricane damage, as offshore drillers continued to benefit from high rig rental rates and tight rig supplies. This year, rental rates for highly sought after deep-water drilling rigs approached $700,000 a day.

But analysts on Thursday asked executives at Diamond, Noble and Ensco how firm such contracts will be if commodity prices continue to plummet and oil companies want out.

Noble CEO David Williams said he has not "received so much as a phone call from anybody saying they have a problem."

He also made it clear there would be consequences if a customer tries to break a contract. "If he walks, he's going to get sued," he said.

Diamond Offshore's Dickerson said he has not seen any deterioration in rental rates for either shallow-water or deep -water drilling rigs.

"Even in the face of declining product prices, we see strength," he said.

Reinforcing the point, the company announced Thursday a two-year, $452 million contract with France's Total for Diamond's semisubmersible Ocean Valiant rig.

The company's board also increased its special cash dividend to $1.88 per share, from $1.25, and declared a regular quarterly dividend of nearly 13 cents per share.

Ensco CEO Dan Rabun also sought to downplay fears of a broad pullback in activity.

"As of today, we have not seen much impact on the offshore market, and customers in international markets continue to discuss increases in spending for 2009," he said.

Angeline Sedita, analyst with Macquarie Capital, said even with oil prices between $50 and $60, the economics of deep-water drilling are still attractive.

"We believe this market should remain intact given the long-term focus and large scale of the major oil companies drilling in this market," she said Thursday in a note to investors.

Drillers with exposure to more volatile shallow-water regions and that do business with less-established oil and gas companies are likely to be hardest hit by the current downturn, said Michael Drickamer, industry analyst with Morgan Keegan & Co.

Large offshore drillers are better insulated because of their diversified international presence and focus on specialized deep-water drilling, he said.

In recent years, a global boom in oil and gas exploration and easy access to credit spurred startup drilling companies and financial speculators to place orders for offshore rigs, particularly those that can operate in deep​ water and command high rates.

Today, 83 rigs are capable of operating in more than 5,000 feet of water, but more than 120 have been ordered for delivery by 2012, according to ODS-Petrodata.

"We expect some of those will not be built," said Tom Kellock, head of consulting and research at the firm's Houston office.

He cited a recent analyst report by another firm, predicting 32 of the rigs under construction and on order are at risk of being significantly delayed or not delivered.

Offshore driller executives said some of those rigs are already being shopped around by companies that can no longer afford to build them. But they suggested the prices are too high at the moment.

"So far, I don't think they're as hungry as they should be," Noble's Williams said, noting that Noble can build a deep-water rig for $150 million less than the $740 million he has heard quoted.

Noble, Diamond Offshore and Ensco were the first major offshore drillers to report third-quarter earnings. Pride International releases quarterly results Oct. 30, while Transocean, the world's largest offshore driller, reports on Nov. 5.

Also Thursday, National Oilwell Varco, a Houston-based supplier of oil and gas equipment and services, said third-quarter net income jumped by about 50 percent to $547.7 million, or $1.31 a share, from $366 million, or $1.02 a share in the same quarter a year ago.

Revenue increased 40 percent to $3.61 billion from $2.58 billion in the year-ago period. Analysts expected earnings of $1.31 a share and revenue of $3.6 billion, on average.

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