Demand for offshore rigs in the U.S. Gulf of Mexico has softened after a natural gas drilling boom in the first half of 2001, but forces that could support a recovery may already be at work, analysts said on Monday.
Drilling has slowed down in the waters off the Texas and Louisiana coasts in response to a steep drop in U.S. natural gas prices from record highs
of around $10 per thousand cubic feet at the end of last year to levels of around $3 in recent weeks.
The number of rigs working in the U.S. Gulf fell to 165 last week from 168 the previous week, bringing the utilization rate for the U.S. Gulf drilling fleet down to 77.8 percent from 90.5 percent in late April, according to Offshore Data Services.
Daily rig rental rates, known as "dayrates" in the industry's jargon, have also fallen as demand has tapered off.
Rates for one class of "jackup" rig capable of drilling in 250 ft. (76 m) of water have fallen from the low $50,000s to the low $30,000s, Lehman Brothers analyst Angeline Sedita, said.
"We believe dayrates have not found their bottoms and could fall even further," Sedita said.
"The Gulf of Mexico could firm by the late fourth quarter, however, we believe it is more likely that we will not see a significant pick-up in demand until 2002," she added.
Sedita lowered her earnings per share estimates for drillers with Gulf of Mexico exposure, cutting her 2002 estimate for Rowan Cos. Inc. by 36 percent to $1.28 and her 2002 estimate for Marine Drilling Cos. Inc. by 28 percent to $1.15.
Rowan and Marine both operate jackup rigs
in the shallow waters of the Gulf of Mexico which holds more gas than oil.
In a recent analysis Simmons & Co. analysts Mark Meyer and David Pursell said gas-drilling in the Gulf of Mexico is particularly vulnerable to lower prices.
As long as U.S. gas prices stayed at levels of $4 or higher, drilling "quick-hit" wells in the shallow waters of the Gulf of Mexico was a "no-brainer", Meyer and Pursell said, even though high depletion rates mean such wells are very short-lived.
At a gas price of $3.50 per thousand cubic feet, a well drilled in less than 150 ft. (46 m) of water delivers a return of 12 percent, but at $3 the return falls to minus 9 percent and at $2.50 it falls to minus 30 percent, they said.
J.P. Morgan analyst Michael LaMotte said he saw signs that suggest the Gulf of Mexico drilling market will start to strengthen by the end of this year or early 2001, noting that Chevron Corp. and Anadarko Petroleum Corp.had both recently expressed an interest in hiring more rigs.
"With the decline in gas prices we've had and the dayrate weakness in some segments of the market, we are finally getting to a clearing price again in the Gulf of Mexico," LaMotte said.
As markets outside North America continue to recover, some rigs will leave the Gulf of Mexico to seek their fortune elsewhere, helping reduce oversupply in the Gulf, analysts said.
Furthermore, with output from existing U.S. natural gas wells declining by about 25 percent a year, the slowdown in drilling in the Gulf should soon lead to reduced domestic gas supplies, higher gas prices and greater demand for rigs, they added.