HOUSTON – Want to drill an oil or gas well? Get in line. After a stunning 2004, this year looks to be even better for drilling companies. And 2006 could top them both, if prices stay high.
To take advantage of oil at $45.50 per barrel and gas at $6 per thousand cubic feet, exploration companies are hiring drillers to get the goods out of the ground fast. Worldwide, more drilling rigs are working now than at any time since the early 1980s. In early February, 2,600 rigs were boring for energy worldwide, up from 1,800 in the last trough of 2002.
This is fantastic news to the oil services industry, where rig counts are a barometer of future demand for pipe, drill bits and a host of specialized services. Diversified mega-corporations like Baker Hughes (nyse: BHI – news – people ) and Schlumberger (nyse: SLB – news – people ) saw earnings advance 50% in 2004, with expectations of additional 25% growth in 2005, if oil stays above $35.
Among drillers, the tightest supply now is for jackup rigs–the mammoth $100 million platforms that drill in shallow offshore waters, supporting themselves on 275-foot steel risers anchored into the seabed. Of the 370 jackup rigs worldwide (94 of them in the Gulf of Mexico), 99.7% are under contract. Jackup rates have doubled in two years, in some cases topping $90,000 a day.
For more advanced deepwater-drilling rigs, analysts eyeing the action expect the rents to hit a record $300,000 a day this year. Leading offshore driller Transocean (nyse: RIG – news – people ) recently contracted a deepwater-drilling rig to ChevronTexaco (nyse: CVX – news – people ) for $207,000 a day, up from $140,000 a day a year ago. It can take two months, or $20 million, for a rig to drill a deep offshore well.
Bank of America analyst James Wicklund sees rates for jackup rigs climbing faster. That portends a good year for Dallas-based Ensco International (nyse: ESV – news – people )–42 of its 53 rigs are jackups, making it the driller most levered to the trend. Wicklund expects earnings to leap 124% this year to $220 million, then push up another 50% in 2006.
That is, if the market doesn’t collapse first. The last time jackup rigs were maxed out was in November 2000. A year later, utilization had fallen to 59%, in a plunge that paralleled a fall in natural gas to $2 per million cubic feet from $10, says Pierre Conner of Hibernia Southcoast Capital in a recent research note. That was part of a broader downdraft in total worldwide rig count to 1,800 from 2,200.
A repeat of that plunge is possible. Producers are watching nervously as above-average winter temperatures have caused inventories to build. Analyst Wicklund says just two weeks of warm weather in the U.S. Northeast could trip gas prices. In past cycles, high prices have resulted in more drilling. That meant more supply, which lowered prices, killing rig demand.
But even if inventory builds in the U.S., global supplies remain tight. The world consumes 84 million barrels of crude a day, just 2 million barrels shy of total capacity, according to Simmons & Co. Chinese demand is forecast to keep climbing, to 6.7 million barrels a day this year, up 8% from the beginning of 2004. If recent U.S. Department of Energy estimates pan out, in late summer the world will be demanding more oil than the industry is able to produce–pushing prices yet higher.
Furthermore, the average offshore drilling rig is 20 years old. Many have been brought out of mothballs and pressed into service during the recent runup. Shipbuilders will likely float a dozen new rigs this year, with three old ones likely sent to the scrap heap. In the future, it will take more rigs to recover hydrocarbons at the same rate as now. Because most of the big, easy-access reserves have already been tapped, the average well today is more complicated, takes longer to drill and yields less oil and gas than a decade ago.
In years to come, warns veteran oil analyst Matthew Simmons, to keep up supply the world will need to build new rigs at a rate not seen since the “Liberty Ship” drive of World War II.
