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Shifting Tides Continue To Produce Uncertainty

With the per barrel price of oil seemingly entrenched in the $12 to $14 range, the offshore exploration market continues to send mixed signals regarding the level and timing of offshore exploration and production plans. As uncertainty, more often than not, equals fear, questions and speculation surrounding the future course of crude values has put a crimp in the near-term outlook for many of the companies which build and supply workboats for the offshore markets.

According to a recent report from the Parisbased International Energy Agency (IEA), oil markets rallied in September, but the rally was apparently fueled by temporary factors, and IEA reasoned that a sustained recovery is unlikely until a parallel Asian recovery takes place. The upward swing saw prices for West Texas Intermediate and Brent jump by more than $2 per barrel, with WTI briefly jumping over the $16 mark and dated Brent approaching $15.

The real pressure created by the all-encompassing Asian financial crisis, however, is best seen in the continuing downward projection for consumption in 1998 and beyond. In its September report dated October 8, IEA once again reduced estimates of the region's demand in 1998 more than one million barrels per day lower than projected one year ago. Projections for 1999 are currently running 170 kb/d below initial estimates made two months ago, as difficulties in Malaysia, Indonesia, the Philippines, Korea and Japan have reduced expectations for these countries, as well as created "downside sensitivity" for other countries in the region including China and India.

Mixed Messages Despite the prolonged Asian financial crisis and consistently low per-barrel pricing, there is still a commitment to discovering and recovering resources from lucrative deepwater developments, and new hot spots offshore Africa and in the Caspian Sea are garnering considerable attention. While E&P budgets have been decreased across the board, it is interesting to note that there has not been a wild stampede to eliminate this work altogether.

One major player, however, did issue the proverbial shot across the bow with an announcement of earnings disappointment last month. Global Industries, Ltd. announced that lower activity levels and inclement weather in the Gulf of Mexico and delayed activity in Mexico negatively impacted second quarter earnings for fiscal 1999. For the quarter ended September 30, 1998 earnings are expected to be down approximately 40% in comparison to fiscal 1998 second quarter earnings.

As a result, Global's Chairman and CEO, William J. Dore, said in a statement "We have already implemented various cost reduction initiatives, including a worldwide salary reduction for most of our salaried staff and we have scaled back our planned capital expenditure budget because we believe that the continued weakness in oil prices and the current economic recession in many parts of the world may cause further contractions in the offshore marine construction sector." While Global perhaps sees the oil barrel as half empty, another major, Rowan, sees it as half full. Rowan reported that it expects the market for drilling rigs to improve, after reporting a 40 percent drop in net income in the third quarter. Net income fell to $32.5 million, or $0.38 per share, compared with analyst forecasts of $0.33 according to First Call, from $54.3 million, or $0.61 per share a year ago. Revenues declined to $183.5 million from $195.5 million as rig utilization fell to 84 percent of Rowan's fleet from 99 percent a year ago due to declining drilling activity as a result of low oil prices. While reporting the lower results, the company remained characteristically upbeat, projecting that there will be an "inevitable improvement" in offshore drilling business.

Another positive is the relatively steady amount of ordering activity on the offshore front. While it does not resemble the bull rush of several month's back, the procurement of new equipment is still humming.

Friede Goldman Offshore recently won a contract from Houston-based R&B Falcon for the Phoenix IV jackup rig. The Phoenix IV, a Bethlehem design, 200 ft. (60.9 m), mat supported cantilevered class rig, is scheduled to arrive at the shipyard later this week with a target departure date of mid November. Friede Goldman is currently working on R&B Falcon's Falcon 100 semisubmersible rig at the HAM Marine shipyard in Pascagoula, Miss.

Transocean Offshore Inc. reported that its fourth-generation semisubmersible Transocean Richardson has received a five-well, minimum 190-day contract from Spirit Energy 76, Unocal Corp.'s Lower 48 E&P unit. Revenues to be generated over the minimum 190-day contract period are $30.4 million. Transocean Richardson is one of seven full or partiallyowned fourth-generation semisubmersibles in the Transocean Offshore Inc. fleet, and one of nine units currently active in the company's fleet and capable of drilling operations in water depths exceeding 3,000 ft. (914 m). In 1997, Transocean Richardson set the current world water depth drilling record for a moored semisubmersible in 5,297 ft. (1614.5 m).

 
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