'Aggressive' Independents Propel U.S. Rig Forecast

Driven by North America's growing thirst for natural gas and more drilling worldwide, Salomon Smith Barney revised its worldwide rig count forecast upwards by 30% and grew its estimated exploration and production midyear spending projections by 25%, predicting 22% more growth in North America alone. U.S. spending, propelled by aggressive independents, is at a higher pace than at any time in almost 20 years.

"Planned exploration and production spending in the United States is expected to increase by 22.3% this year, second only to 2000, as the sharpest year-over-year increase in the 19 years we have been conducting this survey," SSB reported. "Independents account for approximately 76% of the expected increase versus 2000, as they have been much more aggressive than the majors in raising capital spending."

Independents, SSB found, "continue to demonstrate their historically faster responsiveness to commodity price changes. To date, the majors have not been as responsive in the U.S. as their smaller peers." SSB noted that half of the companies surveyed expect spending in the next six months to be more than the first half of the year, and the rest say they will remain the same. Of the majors, 82% expect domestic spending to jump more than 2000, while the rest report they will actually spend less.

Last December, SSB surveyed 177 U.S. independents and found they plan to increase 2001 E&P spending 30.7% over 2000, "yielding $19.6 billion in planned 2001 expenditures versus $15 billion in 2000." Currently, 53% of the independents are "reviewing" their spending plans, and of those, 63% expect to spend more money.

"Additionally, 43% of independents expect 2001 second half spending to be greater than first half spending, with 20% indicating it will be lower and 37% indicating it will be flat," SSB noted.

In Canada, 92 responded to the survey, and reported their spending also is going up about 22% from last year. The increase is less, SSB found, because many Canadian operations did not cut their expenditures as sharply as their U.S. counterparts in the downturn. Canadian operations with "significant" increases this year included Imperial Oil, Gulf Canada, PanCanadian, Petro-Canada, Canadian Natural Resources and Exxon Mobil (Mobil Canada). (SSB did not name any U.S. companies.)

Based on the results of its midyear survey, worldwide spending is now forecast to jump 25.3% in 2001, up from its December 2000 forecast of 19.7%. "This is the sharpest increase in E&P spending since 1981, and it is expected to lead to the highest level of drilling activity in 15 years," according to SSB. The midyear update includes data from 274 E&P companies large and small worldwide.

SSB noted that the jump in E&P spending increase "follows the rapid expansion experienced last year," which could actually "strain the capacity of the industry." In absolute dollars, SSB reported that the size of worldwide spending has "expanded by almost 25% since December (2000)."

Outside North America, SSB found that companies with significant spending increases over last year included Agip, Royal Dutch/Shell Group, ExxonMobil, Petronas, Pemex, Chevron and Kerr McGee.

SSB's mid-year spending forecast is part of "The 2001 Worldwide Rig Forecast" released last week, in which the analysts report that worldwide, rig counts are on track to reach a 15-year high. SSB attributes much of the rig increase to North American natural gas drilling.

"The frenzied pace of drilling for natural gas in the United States has far exceeded our expectations," noted SSB. "In 2001, U.S. and Canadian operators have continued to focus heavily on drilling for natural gas in North America in an effort to take advantage of record high natural gas prices." While the U.S. oil rig count has remained relatively flat, by mid-June, nearly 1,300 rigs were at work, with 1,050 drilling for natural gas.

This year, SSB's overall U.S. rig count is forecast to climb 39%, averaging 1,275 this year, and Canada's rig count to jump 25% to 425 rigs. The biggest jump is in natural gas rigs, said SSB, which predicted 100 more rigs will ramp up, moving up to 1,040 from the previous forecast of 940 this year in North America.

"Drilling activity in North America has risen more sharply than anticipated, driven by increased drilling for natural gas," SSB reported.

With most of the readily available rigs working, drilling contractors are working "feverishly" to reactivate idle equipment to "meet the incredibly strong demand for rigs, particularly land rigs."

SSB noted that Nabors Industries, which holds 25% of the U.S. market, is reactivating up to eight rigs a month, and "we believe the industry as a whole is capable of reactivating 20-25 rigs per month."

SSB analyst Mark S. Urness, chief author of the midyear forecast, estimates that overall, the U.S. rig count will move upward to 1,275 rigs from previously forecast 1,200. In Canada, the rig count is now expected to average 425 rigs, up from 390. The international rig count forecast also is up to 780 from 765. Overall, SSB is forecasting the worldwide rig count to average 2,480 rigs this year, up from its previous forecast of 2,355, a 30% increase over 2000.

The only area of drilling activity that appears flat is offshore, noted SSB, "as operators reassess drilling plans or seek authorization for increased budget funds." Some companies have "apparently exhausted their inventory of high quality prospects and must pause to generate additional drilling locations." While day rates for land rigs is up, rates for offshore rigs "remain substantially below replacement cost pricing, and very little new capacity is being added."

For 2001, SSB predicts a 14% increase in the U.S. rig count, constrained only by rig capacity and a "tight supply of trained and qualified personnel." The forecast next year is for 1,450 units, including 1,150 for natural gas. "Unless the price for natural gas drops below $3/Mcf, we expect operators in the United States to continue to be predominantly focused on drilling for natural gas."

Canada's rig count also is expected to rise, with operators "intensely focused on drilling for natural gas." Like the United States, operators will be constrained by a "lack of ample capacity...particularly drilling rigs and crews." SSB expects the rig count to climb by 25 units to average 450 rigs.

"Our favored names among the drillers for 2001 are Noble Drilling, Pride International, Santa Fe International and Transocean Sedco Forex," SSB noted.

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