Lower resource prices are starting to impact global drilling activity.
Major US drilling firm, Baker Hughes (NYSE:BHI) reported a slight decline in the number of active drill rigs in the US last week, to 1,966 producing or exploring oil and gas rigs, five lower than the previous week. This is the fourth decline active rigs in the last five weeks.
The number of land-based rigs rose by one, to 1,900, while offshore and inland waters saw a drop of three each, ending the week at 18 and 48 active rigs, respectively.
Despite the decline, the latest tally is still much higher than the six-year low of 876 operating rigs seen in June 2009, when much of the global economy was mired in recession.
The story was much the same in Western Canada. As of June 19, there were 205 rigs operating. That’s down from both 227 a year ago and the five-year average of 233.
“I think we’ve been seeing work deferred or delayed or pushed back,” said Kevin Neveu, president and CEO of Precision Drilling. “Not surprising. Until we have some sense of what a stable price looks like, our customers are going to be very careful with their decisions.”
Long-term demand for drilling services should keep rising
Most drillers’ shares have fallen lately, along with a general decline in resource prices. Even so, companies are remaining optimistic about their long-term prospects. That’s because despite today’s volatility, demand for resources – including oil and gas – is expected to keep rising in the long term, particularly due to growth in China and other emerging markets.
Much of the new oil and gas production that will be needed to meet that demand will come from areas that require specialized drilling capabilities, such as offshore oilfields and shale oil and gas deposits.
Here’s a look at three drilling stocks. One operates onshore in North America, another focuses on offshore wells, and the third mainly drills for metals and minerals.
This division offers a range of land-based drilling services, including directional drilling, which involves drilling wells at an angle. This technique is useful in areas where vertical drilling is difficult or impossible, such as when an oil or gas reservoir is located under a town. Directional drilling can also improve efficiency because it allows more wellheads to be grouped together, minimizing the need to move rigs.
Precision’s other division, Completion and Production Services, has 191 service rigs (which are used throughout a well’s life) and a range of other equipment, such as wastewater treatment units.
The company’s rigs continued to be in high demand in early 2012. During the first quarter it had 136 rigs working in Canada, 104 in the US, and two overseas, for a total of 242. That’s equal to the year-ago quarter.
Precision’s revenue rose 21.8 percent in the quarter to $640 million, or $0.39 a share, from $525.4 million, or $0.23 a share, a year ago. Earnings jumped 69.4 percent, to $111.1 million from $65.6 million.
The company expects to spend $975 million on capital expenditures in 2012. It will put this money toward completing 28 of the 42 drilling rigs it started building in 2011 and constructing five additional contracted rigs for this year. It will also upgrade 14 of its rigs.
Seadrill (NYSE:SDRL) is a Norway-based company with a fleet of 62 offshore drilling rigs, including 14 semi-submersible rigs, ten drillships, and 21 jack-up rigs, which are supported by legs that are anchored to the seabed.
The company’s floating rigs saw an economical utilization rate of 94 percent in the quarter. That rate was hampered slightly because Seadrill pulled three rigs out of service for maintenance. The economical utilization rate for both jack-up rigs and tender rigs was 99 percent.
“We remain bullish on the outlook for drilling services, in particular related to the demand we see today for our high-specification equipment,” Seadrill said.
In the first quarter of 2012, Seadrill’s revenue slipped to $1.05 billion from $1.11 billion a year ago. The company earned $439 million, or $0.89 a share. That was down from the $886 million, or $1.83 a share, that it earned a year earlier; the drop was largely due to the sale of its Seawell subsidiary. Seadrill ended the quarter with an order backlog of $13.8 billion.
The company, which started up in 2005, continues to spend heavily on its development. It now has 18 rigs under construction at a total cost of $6.9 billion. Delivery of these rigs is expected between 2012 and 2015.
Major provides a number of drilling services, including directional drilling, reverse circulation (where fluid is pumped down the well and the cuttings are removed through the drill pipe), and coal-bed methane and shallow gas.
In its fiscal 2012 fourth quarter, which ended on April 30, Major’s revenue jumped 72.8 percent to a record $237.2 million from $137.3 million a year ago. Earnings soared 225 percent to $30.7 million, or $0.39 a share, from $9.5 million, or $0.13 a share.
The company continues to see strong demand for specialized drilling from larger mining companies, especially in West Africa and Latin America. During the quarter, its utilization rate for specialized drills stood at 75 percent, near the maximum.
Major expects continued strong results, though it believes junior miners are likely to hold off on certain projects due to difficulties accessing capital. Still, the company remains optimistic that senior companies will continue with their projects – and rising demand should benefit juniors as well.
Francis McGuire, Major’s president and CEO, said, “[w]hile financing difficulties for junior mining ventures will moderate our growth over the short term, it also provides a strong upside potential when their exploration activities pick up, as they must, if the mining industry is to provide the world with the resources it needs toward the end of the decade.”
Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.