Industry makes a comeback
Amazing what $50 oil will do. Suddenly, we need rigs.
With utilization rates nearing saturation, day rates are escalating to unprecedented levels. Meanwhile, rig construction has risen dramatically, with 33 newbuilds currently on the books, and options for several more likely to be exercised in the coming months.
International Editor Judy Maksoud put together two reports on rigs for this month’s special report on worldwide drilling rig activity. Her first, an analysis of offshore drillers and rig activity, begins on page 36.
The future, she reports, looks very promising for drilling contractors. So does the present, for that matter.
“Demand for all major categories of offshore rigs has continued to increase, and dayrates that are currently being discussed are, frankly, higher than I ever would have anticipated,” says Robert L. Long, president and CEO at Transocean Inc. “The difference in this cycle so far in the floater business has been that the operators are almost price insensitive. They’ve driven rates well past what would be considered a newbuild rate,” Long says.
On the topic of rig construction, Maksoud notes that, although yards in the US Gulf of Mexico and China have received newbuild jackup orders, Singapore has cornered the lion’s share of the construction contracts. Keppel FELS and PPL Jurong shipyards have taken on an enormous amount of work. The full report begins onpage 56.
Meanwhile, expect mergers and acquisitions, led by independent oil companies, in the energy industry to come back strongly in the second half of 2005. That’s the message in a forecast released by Rick Roberge, US leader of transaction services for PricewaterhouseCooper.
“While the majors prefer the economics of international ventures over acquiring a company and integrating it, the independents will return to the M&A market in a major way,” Roberge says.
Roberge notes that the five biggest factors driving M&A in the global energy industry for the next six to 12 months are:
•The demand needle points up. With global demand still growing, particularly in China and India, it’s difficult to make a convincing scenario for lower commodity prices. With oil at over $40/barrel for the past year, demand simply hasn’t come down.
•Higher demand = lower reserves. While the majors are banking on large international projects, the big independents don’t have that luxury. M&A may prove the only solution for many independents that need to grow, but can’t count on big investment projects and don’t have a sufficient inventory of projects to grow by the drill bit.
• Big Oil is conservative - for now. The majors are spending less on investment and M&A than they have been in previous high-commodity-price cycles. With the exception of Chevron’s proposed acquisition of Unocal, the majors are staying away from big acquisitions and continuing to use their cash flow for stock buybacks and dividends. While that’s won them points on Wall Street, they can’t delay replacing reserves indefinitely. An internal shift in project economics from $20 to closer to $30 would increase investment and put more projects on the table.
• While some of the super-independents have told Wall Street they’re also going to remain conservative, bankers are making lists of possible buyers and sellers in the segment. Because sellers can get the best price now and buyers need to grow, activity will heat up.
• Natural gas remains ripe for M&A. Look for more acquisitions in this sector, given tight supply and prices exceeding the $6 level. Excluding the Unocal deal, some 60% of M&A in North America over the last two years was natural gas-focused. With major LNG projects still years away, Alaskan gas pipelines nowhere near finished, and big production declines in the Gulf, natural gas will continue to be an important part of the M&A story going forward.
That’s how it looks for now. Stay tuned...