Fitch: Gas E&P Boom to Last Another 18-24 Months

Due to the strong upcycle in worldwide natural gas exploration and production, drilling contractors and oil field service companies are reaping the benefits and padding their 2001 earnings significantly. Even though every surge has its limit, the recovery of the industry and the "corresponding financial improvements" when compared to late 1998 and 1999 will be sustainable for "at least the next 18-24 months," according to Fitch IBCA, Duff & Phelps.

In the company's recent special report, Fitch analyst Randall Biang said the natural gas drilling surge is showing no signs of slowing. He noted the high drill rig demand is due to "strong natural gas demand" and "high reserve depletion rates." Although Fitch predicts there will be a multi-year upcycle for drillers and service companies, it warns that long-term industry performance will remain closely bonded to volatile commodity prices.

One of the factors hindering this latest E&P surge is the rig shortage, both onshore and off, the analyst said in his report. With record levels of rigs operating within the United States, and the country operating 60% higher than the drilling level last year, gas producers have started to stop the decline in production.

"Fitch continues to expect a strong upturn in U.S. land-rig activity over the course of 2001 and into 2002, limited only by the supply of available drilling rigs," the report said. "The U.S. upstream is quickly approaching that top. Land rig contractors have been hurrying to refurbish rigs abandoned or cannibalized for parts since the last drilling boom."

Nabors, the largest U.S. land drilling contractor, has reportedly reactivated 67 rigs since September 2000 and expects to reactivate the same number in 2001, according to the report. Another contractor, Key Energy Services, has refurbished 148 rigs since January 2000.

"While the unavailability of land rigs could limit upstream activity, the ultimate limiting factor is the quality of shallow and medium-depth drilling prospects," the report said.

However, many contractors don't want to bring too many rigs online too soon because they would rather raise day rates. Fitch estimates that over the last year, deep land-rig day rates have increased between 55-80%. The analyst said day rates have already reached the peak level they were at during the last boom and show no signs of stopping. Currently, deep land-rig day rates are averaging between $10,000 to $13,000, according to Fitch.

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