The coming year looks to be a positive one for oilfield service operators in North America, except in the Gulf of Mexico (GOM), where business may continue to be slow, energy analysts said last week.
Low natural gas prices have begun to negatively impact the capital spending plans for onshore exploration and production (E&P) companies, but higher natural gas liquids prices, as well as growing oil shale development, is a bullish sign for onshore operators.
Barclays Capital analysts based their positive outlook on their recent spending survey of E&Ps, which was issued a few days ago (see Daily GPI, Dec. 16).
"The oil drilling renaissance in North America is continuing to gain momentum and despite weak natural gas prices E&P spending is expected to rise in 2011," said Barclays' Jim Crandell and his team. "Given the higher levels of pricing for services and equipment we continue to believe the rig count will be flattish by later in 2011 with a decline in dry gas drilling ultimately offset by increasing oil and liquids-rich activity."
The shift toward exploiting shale plays and the "reemergence of oil as a major drilling target for North American E&P companies has decreased the cyclicality of the U.S. and Canadian oil service industry and over the long-term given it a greater growth trajectory," said Crandell.
Moody's Investors Service Inc. also is optimistic about the onshore services sector in 2011.
"Robust demand will keep industry capacity tight and provide further opportunities for price increases," said Moody's Vice President Peter Speer. "Additionally, strong oil and natural gas liquid prices will support the continued development of oil and high liquid-content U.S. plays."
Speer is concerned about the sector's exposure to commodity price declines and the "heightened" U.S. regulatory scrutiny of hydraulic fracturing, which he said could push costs higher and limit the pace and scale of E&P capital investment.
"Although natural gas drilling is likely to decline moderately in 2011, many E&Ps will probably keep drilling despite the weak economics to retain their leases or avoid steep production declines," Speer said. Any declines in gas-directed drilling are likely to be offset by oil drilling, leading to a higher U.S. rig count in 2011.
Fitch Ratings also is forecasting "robust contract backlogs," which will result from a combination of high oil prices and "modest improvements" in U.S. and global economic conditions.
"We're expecting most firms to remain at or near their target capital structures," said Fitch Director Adam Miller. "Assets nearing the end of their useful lives are expected to under-perform in 2011 as Fitch anticipates a continued preference by upstream producers for newer equipment with the latest safety features, a trend expected to increase post the BP/Macondo spill.
"Additionally, North American natural gas-focused assets could begin to under-perform during the second half of 2011 as Fitch anticipates continued low natural gas prices combined with reduced upstream hedging gains and fewer drill-to-maintain lease activity resulting in less North American land based drilling activity."
According to analysts, the outlook is more cloudy for operators that work offshore. The Barclays team is focusing "on those companies with the highest quality assets as we expect the current bifurcation in the rig market to persist and probably widen," said Crandell. "We believe many of the offshore drillers are faced with declining demand for older assets and that these companies will need to devote significant amounts of capital to 're-fleeting' over the next several years in order to remain competitive.
"The oil and gas companies are demanding new, efficient and safe equipment and many of the drilling contractors have failed to invest appropriately in recent years and will be challenged in the offshore market of the future," he said.
IHS Herold said the offshore moratorium took a big toll on the sector, but it sees a "healthier growth outlook" in 2011. More mergers and acquisitions (M&A) also are predicted.
"Many of the service companies, and in particular the offshore drilling companies, took a financial beating following the Gulf drilling moratorium," said IHS' John B. Parry, principal energy analyst, who authored the firm's review of the sector. "With the lifting of the moratorium, the industry has moved to a more offensive posture."
Post-moratorium challenges still persist because a return to offshore drilling has been slow, said Parry. "This has fed a general decline in rig-utilization rates while new-build rigs continue to enter a sluggish market...For these companies to continue to help meet the changing competitive and technological requirements, particularly for offshore drilling, we see ongoing consolidation as part of the mix.
"In 2009 and 2010, our energy M&A team tracked more than 80 transactions in the oilfield services sector, valued at nearly $40 billion. We expect that number is likely to remain healthy in 2011."
What's holding back development in the GOM is a lack of permitting, said analysts at Tudor, Pickering, Holt & Co. (TPH).
"We have seen little improvement in permitting with only 20 new shallow-water well permits and one new deepwater well permit approved since June 8 and Oct. 12, respectively," said TPH analysts.
The Bureau of Ocean Energy Management Regulation and Enforcement's (BOEM) offshore guidance, Notice to Lessees-10, "has thrown a lot of confusion into an already murky permitting situation," said the TPH team. BOEM last Monday issued guidance clarifying the order (see Daily GPI, Dec. 15).
"In order for the offshore drilling universe to show significant improvement, we need the GOM firing on all cylinders (or at least half)," said TPH analysts. "Unfortunately, not seeing those signs of life right now." The GOM floater rig count was at six last week versus 27 in 4Q2008, and the jackup rig count is at 30 versus 54. "But...before we get too bearish...oil is still above $80/bbl. We expect most of the rigs (currently working) to find homes at rates essentially flat with current levels."
Offshore drillers and related logistics service providers are a "notable exception" to Moody's positive outlook, said Speer.
"We expect many of these companies to experience further earnings declines in 2011, as the U.S. develops new regulatory requirements and permitting processes following the Macondo accident in April 2010, and as activity slowly increases in this large offshore market," he said.
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