Gulf of Mexico

Valued at near $5 billion, the Reading & Bates - Falcon merger leaves other Gulf of Mexico deepwater players, including now former deepwater leader Diamond Offshore, playing catch up. Falcon Drilling and Reading & Bates agreed to a handy (read tax-free) stock deal to create an offshore behemoth with no fewer that 14 rigs capable of drilling in deepwater and a solid fleet of jackups and barges.

R & B, Falcon merger sign of things to come

Valued at near $5 billion, the Reading & Bates - Falcon merger leaves other Gulf of Mexico deepwater players, including now former deepwater leader Diamond Offshore, playing catch up. Falcon Drilling and Reading & Bates agreed to a handy (read tax-free) stock deal to create an offshore behemoth with no fewer that 14 rigs capable of drilling in deepwater and a solid fleet of jackups and barges.

With decreased exploration costs and massively increased rig demand, opportunity is a matter of what company can get its hands on the largest number of mobile rigs quickest. In the midst of the deal, the two companies announced new agreements. (1) Falcon is planing a long-term contract in the deepwater Gulf featuring a new drillship conversion. (2) R&B inked a deal with Shell for a new generation ultra-deepwater moored semisubmersible, the RBS-6, under a firm five-year contract worth $335 million. The RBS-6 can operate in a moored configuration in water depths up to 8,000 ft. and will cost $235 million. There has been other pivotal action among drillers:

  • Global Marine: The company is purchasing two third-generation semis for $250 million. The company can afford it; in fact, Standard & Poor's moved to upgrade Global's credit rating to BB.
  • Diamond Offshore: Diamond Offshore is performing so well, it chose to split its stock - valued at about $80, a little more than twice the sector average - to make accessible to smaller investors.
  • Noble Drilling: The firm's aggressive 10 million share stock buyback has driven it's book value up several dollars in the last couple of months.
  • Ensco: The firm recently received two contracts for the jackup Ensco Rig 37 for a record $80,000 a day.

Day rates unhindered by negative forecasts

The recent forecasts have had little impact on drilling day rates in the US Gulf. The International Energy Agency announced there was too much crude oil, despite rising demand, and analysts immediately began running scenarios of crude dropping $3 a barrel.

Also, analysts are watching Canada, worried that new pipelines and rising gas imports will reinflate the US gas bubble. A third factor is the US NOAA prediction of the worst El Ni?o weather event in 50 years.

Despite these, day rates continue to rise and the stock market is starting to take note. As a sector traditionally lashed to the fluctuating price of crude, drilling companies seem finally to be defining their own value based in the dynamics of the market, rather than an association with downstream commodity pricing.

Welcome to Florida- now go home

In legislation brought forward by US Senators Connie Mack and Bob Graham, both of Florida, a permanent 100-mile buffer zone would be established around Florida and cancel the Pensacola 933 Unit leases held by Mobil Exploration. That was enough for Mobil, apparently. Not waiting around for the final decision, Mobil said it will give up six leases it owns in federal waters off the Florida panhandle. Mobil, already in negotiations with the US Minerals Management Service to drill and explore the leases, is pulling out, forgoing the opportunity to obtain a possible government buyback of the property.

Will merger spin out TOPS unit?

Reading & Bates Development has announced two more writeoffs on unsuccessful wells - Garden Banks 372 No. 1 drilled on the Knight prospect, and Ewing Bank 786 No. 1 drilled on the Emerald prospect. This means a $7.3 million write down for the second quarter.

With the Falcon merger announced, R&B may have some tough choices about its policy of taking equity stakes in wells. In fact, Falcon has indicated that the new company will focus on drilling, not equity. So, the merged operation may choose to spin out Total Offshore Production Services. Much will depend on how the new operation views risk.

E&P Update:

  • In reaching a total measured depth of 22,441 ft, BP Exploration broke the previous Gulf of Mexico record for extended reach drilling. With the Pompano A-18 well in the Viosca Knoll 989 area of the Gulf, BP attained a stepout of 18,275 ft, with a TVD (vertical) of 10,437 ft. Drilling by the Helmerich & Payne 100 Rig took 80 days from spud. It is believed that the 13 3/8-in. casing string set at 14,086 ft also sets a record for the longest casing string of its size.
  • The BPX pre-project plan for Atwater Canyon Block 575 has been named Neptune, despite the fact the Oryx already has a Neptune discovery (Viosca Knoll Block 826, which it is being developed with a spar). The BPX field is in ultradeep water, over 6,000 ft, and may be developed using subsea production. BPX is considering everything from a FPSO to a spar or a semisubmersible for development.
  • Equitable Resources Energy has a second discovery in the West Cameron Block 540 (OCS-G 15110 No. 3). EREC is the operator of the well and drilled to a TD of 7,400 ft, encountering 110 ft net gas pay from the 7,060-7,198 ft interval. The well was suspended pending fabrication of a platform, production facility, and pipeline. The No. 2 and No. 3 wells from the discovery should be onstream by next year.
  • GHP Exploration has purchased participation in two prospects in the Gulf of Mexico. GHP will have a 15. 5% interest in a prospect near West Cameron Block 195 and a 10% interest in West Cameron Block 18. Both prospects are operated by IP Petroleum. WC 195 is offset by the WC 196/197 field that has produced more than 160 Bcf. The well is planned for a TD of 11,000 ft. WC 18 is adjacent to WC 17/19 Miocene Fields with cumulative production of 87 Bcf and 85 Bcf, respectively. The well will be drilled to a TD of 16,000 ft.
  • Kerr McGee will develop its Garden Banks 65 Field, which includes GB21 and 22 and East Cameron Block 373. First production is expected in mid-1998. The initial rate will be 60 MMcf/d. Kerr McGee owns 60% of the field; Newfield Exploration owns the other 40%.
  • The first official deepwater royalty relief now in the history books (Tatham Offshore's Sunday Silence Field in Ewing Bank 958 and 1003).

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