US drilling softness will continue; rebound possible at end-1999

Rig availability up; activity weakens

Marshall DeLuca
Business Editor

Reed Rig Census forcast for 1999 (Revised - 9/98) [8,398 bytes]
Simmons and Company's offshore drillers historical operating performance* [13,613 bytes]
In the firm's annual forecast to the Inter national Association of Drilling Contractors (IADC), Reed Tool is forecasting continuing softness in US onshore and offshore drilling activity with a possible rebound occurring late in the year. For 1999, Reed Tool advises caution and a wait-and-see approach.

The Reed forecast projects a further activity decline of 5% for the 1,240 offshore and onshore drilling units reported on by Reed, and a 1% total fleet size increase. The company says the next year calls for caution and a wait-and-see attitude.

Reed Tool and Simmons & Co. International presented annual reports at the IADC annual conference held in New Orleans in September. Reed Tool introduced the 1998 Rig Census and Simmons & Company published the 1998 Annual Driller Survey Results.

Simmons financial report

Compared with the US land and international land sector, offshore drilling was more profitable, stated Matthew Simmons of Simmons & Co. International at the IADC conference. Other trends, reported by Simmons, are the following:

Revenues: Revenue flows for the offshore sector showed a 72.5% increase in 1997. Driven by continued offshore development, revenues soared to their highest level ever. For the fourth consecutive year, increased utilization and day rates led to higher profitability levels among the offshore drillers.
Supply and demand dynamics: Waiting periods for drilling units have fallen since 1997. While rig supply remained relatively unchanged, rig demand decreased 1% for offshore rigs. The average waiting periods in months for offshore fell from 10.7 in 1997 to 7.9 in 1998.
Capital requirements: The combination of high levels of recent capital expenditures and a decline in drilling rig demand has caused a significant decrease in the estimated capital expenditures required to maintain marketed rigs. The estimated drillpipe required over the next two years has fallen even more dramatically. Capital expenditures per marketed rigs offshore fell 51% from $1,827,000 in 1997 to $895,000 for 1998. Additional drillpipe needed over the next two years per marketed rig (in feet) fell 39% from 8,983 in 1997 to 5,465 for 1998.
Labor issues: The availability of qualified labor continues to be a major concern shared by most drilling contractors. After remaining relatively flat in 1997, compared to 1996, offshore drilling wages increased 11% in the 1998 survey. Average hourly rate paid to drillers rose from $18.30 in 1997 to $20.36 for 1998. Tool pushers' salaries averaged $72,108 annually, drillers averaged $20.36 per hour base, and drilling crews averaged $14.54 per hour base.

Simmons reports that financial performance reached record levels in 1997 driven by increased utilization and dayrates in the sector. They also reported that utilization in the offshore drilling sector is up 2% to 93% for 1998 from 91% in 1997.

46th Reed Rig Census

"More or less, the price of oil will go up or down - or maybe it won't," was the forecast for the future of oil prices by Reed Tool at its presentation of the 46th Annual Reed Rig Census at the 1998 IADC Annual Meeting in New Orleans. According to the census, availability of US onshore and offshore drilling units has risen, rig activity is down, utilization has dropped, and rig rates are lower for many contractors.

The census reports that this is the second straight year of increased rig availability. A total of 1,705 rigs are available in the US onshore and offshore fleet. This is an increase from 1,665 rigs from last year. Rig activity is down to 1,305 active rigs, and utilization fallen from 87% to 76.5%, which is the utilization rate last experienced in 1996.

A total of 72 rigs have been deleted from the fleet: 29 due to the large capital expenditure required, 22 were cannibalized or auctioned for parts, 10 moved out of the US, eight were stacked for more than three years, and three were destroyed.

On the other hand, 112 rigs were added to the fleet: 62 were assembled from components, 37 were brought back into service, seven were newbuilds, and six moved into the US. This number provides a net change of 40 rigs from last years total available count.

The census also determined that 50% of the fleet is owned by large contractors (contractors with 20+ rigs). When the census was taken last year, contractors were most concerned over crew availability, drill pipe replacement, and rig rates. This year, the concerns changed. Rig rates were the number one concern, followed by crew availability, and drill pipe replacement.

Also, contractors had forecasted $20.39 bbl of oil and $2.26 Mcf of gas for 1998, compared to the current $14.32 bbl of oil and $1.78 Mcf of gas.