Offshore service companies are returning to the U.S. Gulf of Mexico (GOM), which portends a healthier outlook for the industry this year, according to an update by energy consultant IHS Herold.

According to an update issued on Tuesday, the recovery generally is being driven by continued strong oil prices and rising worldwide exploration and production budgets. The U.S. deepwater drilling moratorium constrained what would have been a strong rebound for the sector overall, the update said.

A preliminary outlook for the oilfield service industry in 2011 was issued in December by IHS Herold, which reported then that the offshore moratorium was stifling the sector (see Daily GPI, Dec. 20, 2010). The update compared key oil company financial performance for full-year 2010 against sector performance for 2009, including multi-service companies, as well as drillers.

"Many of the service companies, and in particular the offshore drilling companies, took a financial beating following the Gulf drilling moratorium," said IHS energy analyst John B. Parry, who authored the update. "That negative impact constrained what was otherwise a substantial recovery for the sector compared to 2009 results."

The sustained financial performance for multi-service companies came from rising oil prices, as well as strong unconventional drilling in North America, he said.

Now that the industry is preparing to explore the GOM again, and as Mexico's Petroleos Mexicanos, or Pemex, relaunches its deepwater drilling program, "we expect that offshore drillers are breathing a collective sigh of relief," said Parry.

Still an issue is the oversupply of an aging jackup fleet. Many of those older rigs are in the process of being upgraded, and with the influx of newbuild deepwater floaters without long-term contracts, sector profitability will be a challenge, he noted.

Gas and oil shales, as well as other tight plays, will continue to drive activity in North America's onshore "through much of 2011, albeit with some leveling of activity as the year progresses due to concerns over developing excess gas supply," said Parry. IHS also expects a "gradual easing" of constrained pressure-pumping capacity for hydraulic fracturing as the year progresses.

Based on company information, larger drilling budgets are expected as the "logjam of work opens up and companies call on service providers to engage their rigs in more traditional regions of the world in 2011 and 2012," said Parry. Beyond 2011 the sector outlook is positive.

"We expected offshore contract drillers to see increased demand for their newer, more technologically advanced rigs," he said. "With offshore rig newbuilds, the multi-service providers should see some benefit as well. Meanwhile, expectations for favorable earnings growth in 2011 and 2012, and the heightened pace of industry transactions continue to be a drawing card for investors," but the full-cost implications of the Macondo well blowout in the deepwater GOM "is as yet uncertain."

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