Offshore: Gearing Up For The Rebound

While 1998 was difficult for the offshore drilling service and supply industry, but it seems 1999 will be worse.

While the price of oil unquestionably maintained a lower profile throughout 1998, the massive Exploration & Production (E&P) were not fully felt until this year, and the recent release of 1Q earnings from the industry majors fully reflect this. While the cyclical nature of industry is expected, it doesn't make it easy. Layoffs, rig cancellations, drilling postponements — all indicators of turbulent times for the oil industry, as low oil prices continue to alter business from the boardroom to the drilling rig. Utilization of the world's floating rigs has continued to decline in recent months according to Offshore Data Services, Inc.'s latest forecast released in its Offshore International newsletter. Large reductions in exploration and production spending are beginning to take effect, and even with the recent oil price increase, floating rig utilization is destined to trend downward over the coming months.

The offshore rig market continues its slide with worldwide rig demand falling by 32 units from December 1998 to March 1999, according to Offshore Data Services. In the first three months of 1999, worldwide rig demand fell from 473 rigs to 441 rigs, the lowest level of demand since August 1992.. While world-wide rig demand has bounced back to 460 in April, a one-year, 122 net decline in rig demand is staggering in its own right, as oil company cutbacks undoubtedly will push demand lower. The U.S. Gulf of Mexico rig count is the poster child for the ravaging effects of low oil and natural gas prices.

Demand in the region has steadily declined since early 1998 and currently stands at 115 rigs, a 15-rig decrease over the last four months. With a rig fleet of 180, utilization has dropped to 63.9 percent. Amazingly, floating rig day rates have held their own since Jan. 1. Fourth-generation semis continue to sign deals in the $150,000 to $160,000 range, just as they did in January. Day rates for the U.S. Gulf's third-generations semis also have held steady; these rigs continue to earn between $95,000 and $131,500 per day. Second-generation units in the U.S. Gulf are making between $35,000 and $58,000/day, compared to a day rate range of $45,000 to $50,000 in January.

June, 1999 In the offshore regions of Latin America, day rates for second-generation semis have fallen from a range between $121,600 and $142,200/day in December 1998 to between $70,000 and $94,000/day in March. Day rates for third-generation semis also reflect the region's tough market conditions.

When looking at day rates in the North Sea/NE Europe region, one number — $100,000 — sticks out. That is how far day rates for North Sea third-generation semis have fallen. Rigs that were garnering between $102,500 and $135,000/day in early Jan. are signing new contracts in the $30,000 to $51,000 range. The dramatic day rate drop is the result of rigs completing long-term contracts and finding new work available, but only at rock-bottom prices. Fourthgeneration semis in Northwest Europe are earning between $123,000/day and $157,000/day. The European rig count h a s s h o w e d r e m a r k a b le stamina in the face of falling oil prices; utilization remains above 90 percent for the area's 46 floating rigs. Most of this staying power is attributable to the longterm nature of the region's contracts and the willingness of drilling contractors to accept the aforementioned day rate cuts. However, the number of rigs actively drilling is much lower, only 38, placing the working rig count at 83 percent. The number of rigs under contract and/or day rates could fall in coming months with seven floating rigs completing their existing contracts by the end of June. While the picture is bleak, the keyword today is momentum, and the offshore industry has found some (of the positive nature) in recent months. Since mid-March, the oil price per barrel has steadily marched upward, buoyed by cuts from OPEC producing countries. While insiders warn that the true recovery will come only when product demand regains a healthy growth course, it seems this is inevitable given the faster than expected economic recovery in Asia.

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