After sifting through the numbers of the recent ReedHycalog Rig Census, analysts at Raymond James & Associates found some interesting new trends in the drilling industry, particularly the shift in domestic drilling to a larger land fleet, migration of the offshore rig fleet overseas and higher domestic rig utilizations — but still below the 2001 peak.

According to ReedHycalog, the total U.S. rig count grew 5% (83 rigs) over the last three years to 1,719 rigs both onshore and offshore. The U.S. land fleet grew by 118 rigs (or 9%) over that period to 1,488 rigs, but the offshore fleet dropped sharply, 35 offshore rigs (or 13%), with rigs rapidly migrating to other parts of the world, driving the domestic offshore rig count to its lowest level since 1996.

Active rigs totaled 1,334, an increase of 119 rigs (10%) compared to 2000 levels, according to ReedHycalog, which measures active rigs differently than does Baker Hughes. ReedHycalog counts the number of rigs that are active at any time during a 45-day period in the early summer, while Baker Hughes only reports those rigs that are actively drilling any given week.

According to ReedHycalog, active rigs increased 16% this year compared to 2002, but in 2002, the number of active rigs had declined 16% from 2001 levels.

The Reed census showed that rig utilization rose to 78% this year as compared to an estimated 2002 rig utilization of 67% and a 93% utilization in 2001.

“The Reed census estimates that the fleet size will not change significantly in 2004. When plotting our 2004 rig count forecast over Reed’s estimated fleet size, we are on pace to reach peak 2001 utilization levels by next year’s census,” said Raymond James analysts J. Marshall Adkins and John Tasdemir in their “Stat of the Week” equity research note.

Actually Reed forecasts “slow and steady activity growth,” and a 2004 utilization rate of 81% rather than the 93% peak in 2001.

Nevertheless, next year’s rig market should be tighter, forcing up drilling costs, particularly on land. “It would appear [that] increasing land drilling activity is on track to drive solid [drilling] price increases in early 2004 since the 1,000 land rig count today is only 100 rigs shy of the peak in 2001,” the analysts said. “With today’s Baker Hughes count modestly above 1,100 rigs, the rig count would only have to increase another 20% (or 220 rigs) before the industry totally runs out of rigs. Let’s not forget that the U.S. rig count was up over 25% this year and the E&P industry did not come close to spending their cash flows.”

Drilling industry consolidation continued this year as larger contractors (owners of more than 20 rigs) acquired 63% of the available fleet. The number of rig owners declined by 12 as a result of consolidation and company closures. There are now only 179 drilling contractors in the United States, compared to 609 in 1988. The top five contractors control more than 70% of the rig fleet.

“This fact coupled with our expectations of continued increases in domestic drilling activity point to higher utilization levels of the rig fleet and greater profitability for contract drillers.” Raymond James touted Patterson-UTI, Nabors Industries, Grey Wolf and Unit Corp. as some of the beneficiaries of this trend.

A summary of the results of the 50th ReedHycalog Rig Census can be found at www.GrantPrideco.com. In December 2002, ReedHycalog was acquired by Houston-based Grant Prideco from Schlumberger.

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