The energy analysts at Raymond James & Associates Inc. spent some time earlier this month at the Offshore Technology Conference (OTC) in Houston and concluded two things: offshore activity in the Gulf of Mexico (GOM) continues to improve but in the U.S. onshore, liquids-weighted drilling appears to be slowing down.
The OTC, which is the largest annual exhibition for oilfield companies, primarily focuses on the offshore, but depending on the news of the day, onshore activity is on the agenda either in some of the conference activities or on the exhibit floor in the back-and-forth among attendees.
"We came away from this year's OTC...with our views on the energy industry intact," said J. Marshall Adkins and his Raymond James team in a note to clients last week. "While offshore activity in the Gulf of Mexico continues to progress, albeit at a slow steady rate, commentary from the offshore participants indicates that tendering activity continues to ramp up, particularly on the subsea and high-end equipment side.
"Looking onshore, we continue to hear anecdotally that the recent supply and demand dislocations of equipment could likely continue for the next few months, but expect to see the market firm up in the back half of the year. Although we continue to get pushback from our 2013 outlook, we hold fast that recent U.S. oil production trends should put downward pressure on oil prices (read WTI [West Texas Intermediate]) and slow down oil and liquids-rich drilling activity next year."
Because the OTC has evolved into one of the world's largest energy industry events, the hottest trends and newest technologies in the oilfield service and energy-related manufacturing companies from around the world are exhibiting and ready to talk with potential clients, analysts and the media. More than 89,000 people descended on Houston last week for the four-day event, 14% more than last year and the highest attendance since 1982, the OTC staff noted. Historically, attendance levels at OTC have been linked to oil prices. The 2,500 companies exhibiting were slightly more than the number that presented in 2011 and similar to the all-time highs back in the early 1980s, noted Raymond James.
The analysts concluded several key things from this year's event. "Subsea demand continues to grow. While we remain of the opinion that U.S. onshore activity is on a steady decline, the offshore marketplace is a different story. With Brent crude trading at a $15 premium to WTI, the economics of offshore drilling remain quite robust.
"As such, given the tightness in the market for offshore rigs, we've seen record day rates and a steady influx of offshore deepwater newbuild activity. This plays right into the hands of the manufacturers of offshore and subsea equipment. There were a number of subsea trees on display and in speaking with employees at the production facilities, it sounds like orders are continuing to flow in with pricing improving along the way."
Subsea/offshore processing for crude oil and gas production also was a "big theme" said the Raymond James team. And there was a "premium placed on safety," which came as no surprise. "Redundancy and automation were two of the major factors manufacturers continued to drive home this year. With federal regulators pushing ever increasing safety regulations, companies are placing a significant focus on blowout preventers (BOP)." National Oilwell Varco, noted the analysts, displayed what the company claimed is the world's first 30,000 pounds/square inch BOP monitoring system.
"Remember, the success/failure of the BOP was a key consideration in the Macondo investigation, and a combo of a kinked piece of drill pipe and tool joints likely prevented the BOP from operating properly. Overall, companies continue to focus on manufacturing and service excellence while choosing quality over benefits to the bottom line."
Meanwhile, onshore activity remained a "very prevalent" theme, and "current trends were on the forefront of many conversations overheard this week. The reasons, however, were quite a bit different."
Last year a big demand for oilfield equipment, especially for completion equipment, sent service prices up and manufacturers' backlogs grew.
"This year, low natural gas prices have prompted a mass exodus of oilfield equipment from gassy plays like the Barnett, Haynesville and the Marcellus to oil and liquid-rich plays like the Permian, Bakken and the Eagle Ford, radically shifting the supply and demand balance," said Adkins and his colleagues. "For reference since last year's conference the oil rig count is up 400 rigs while the gas rig count is down 270 rigs."
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