Offshore activity continues to grow as development begins on a slate of recent discoveries, a sharp contrast to onshore operators, whose “attitude was rather somber,” according to analysts with Raymond James & Associates Inc., who shared their takeaways from last week’s Offshore Technology Conference (OTC) in Houston.
The OTC is considered the single biggest yearly exhibition of oilfield companies, and this year, with record attendance of more than 104,000, there was some focus not only on the offshore, but for onshore equipment as well.
Raymond James’ view of the energy industry was “largely confirmed” by conference chatter, wrote J. Marshall Adkins, James M. Rollyson and Collin Gerry. The offshore industry looks optimistic and strong, with “record bookings for manufacturers on the subsea and drilling equipment side, which is a theme we expect to continue for the foreseeable future.”
Conversely, the chatter among onshore operators was more dour, “though there were some signs of a bottoming or even slight pickup in demand on the pressure pumping side. Most land guys were ‘hopeful’ that a strengthening gas market could lead to an increase in the gassy rig count (time will tell). While this may prove to be the case, we remain concerned about the back half of the year for U.S. land guys should WTI [West Texas Intermediate] prices continue to soften.
“Bottom line: offshore and international attitudes and activity remain robust and full of optimism. The U.S. land players, on the other hand, seem to be finding a bottom, but their optimism is much more cautious.”
The record attendance, the second highest level since 1982, wasn’t a surprise, given the strength of oil prices, the tight offshore drilling market and Houston’s good May weather, said the trio. More than 40 countries were represented with 2,728 presenting companies. The Raymond James team’s top takeaways were that subsea demand growth is real and will continue; offshore equipment companies remain focused on increased uptime, safety and redundancy; and bigger is better. There also was a lot of talk about onshore activity trends, including that demand for hydraulic fracturing (frack) pumps may have bottomed.
For the third year in a row, “current onshore activity trends were on the forefront of many conversations overheard,” said analysts. “With natural gas trading nearly two times last year’s prices at this point, many manufacturers were optimistic we could see an increase in gassy activity. While this theme has not shown up in the rig count yet as gas prices have pulled back from $4.50/Mcf to the $4/Mcf level currently, many were hopeful that higher gas prices would ultimately lead to a pickup in activity.
“While our conversations remained rather lackluster in regards to North American demand, most companies continued to support the idea that international demand has remained strong as unconventional resources begin to be developed…All in, there was some positive (or rather less negative) commentary regarding North American trends…”
Analysts were “surprised to see just how many companies are manufacturing frack equipment these days. The huge increase in demand over the past few years has led to a substantial number of new entrants into the market, just in time for the market to pull back. Interestingly, despite all the negativity surrounding frack overcapacity, several companies noted they had begun to see a slight uptick in pressure pumping equipment demand, though this was understandably mostly aftermarket parts rather than complete spreads.
“However, pricing has not seemed to increase in conjunction, and many manufacturers expect a consolidation in the industry as the smaller pumpers are really struggling…”
A prevalent theme was the shift toward “bigger, more powerful equipment” for the onshore and offshore.
“This is partially a function of necessity as wells are being drilled deeper, laterals continue to be extended and more fracks are being completed on each well. Furthermore, the shift toward deeper waters means more pressure/power is needed at the topside…All in, we expect manufacturers to continue focusing research and development dollars on increasing power without increasing the footprint as operators look to drill deeper and faster.”
Subsea demand appears finally to be taking off, evidenced by “strong bookings” for operators in the first quarter, said analysts. Pricing also has begun to improve, and even though lead times “remain in the one-year realm…continued investment in capacity expansion initiatives should help decrease this over time.” Raymond James analysts expect U.S. onshore activity to steadily decline, which means that “the subsea realm is a good place to hide in a pullback, as Brent crude should remain at a healthy premium to WTI and the economics of offshore drilling remain quite strong.”
With offshore dayrates commanding $600,000/day for ultra-deepwater rigs, operators remain laser focused on decreasing downtime, said analysts. There’s also a continued strong emphasis on spill prevention and safety, with a substantial increase in the amount of equipment “redundancies,” such as dual blowout preventers. These trends have led to an increase in orders and a focus on R&D.
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