Drilling On The Edge
Posted by zmann on October 8, 2006
Drillers. As I’ve mentioned here before, falling natural gas and oil prices will lead to reduced drilling activity. No kidding right? But are we just pausing in the inexcorible march towards ever higher rig counts or is it different this time? While magnitude of a dip in oil and a year long slide in natural gas prices is unclear, the direction of future earnings is more certain. Down and down significantly and soon in some cases.
— The impact on drilling activity is delayed like the impact on the economy following a change in fed funds. Instead of a yield curve you have a capital expendires/budgeting curve. Generally, the lag period is shorter for the shallower, lower cap-ex intensive projects (say 3 to 6 mos), and takes longer to be reflected for you mega super deep offshore drilling programs.
— This is why your onshore and shallow water drilling companies are seeing estimate reductions at this time while the semi-submersible companies (who do the heaviy lifting in the deepwater) and seen little if any impact.
— Moreover, Baker Hughes rig counts are coming down pretty fast onshore. Believe me, that’s news as of Friday afternoon but we’re still near the top and 16% higher than year ago levels.
— Onbshore this leads me to pick on PTEN, PKD, and GW as vulnerable. #s have been coming down for 3 weeks now and earnings are due at all around month end.
— Others who are starting to show some inkling of weakness are the Jackup intensive offshore drillers – I really like ESV, GSF, RDC here on the Put side.
— Among the deeper operators I’d look for RIG, DO to start getting cautious. Rigzone is now calling possible weakness as early as 2Q07, probably the first such call in 3 years.
— Finally, PDE is a nice mix of all environments (onshore, transition zone, shallow water and deep), with int’l exposure but not Canada (which is ramping up this time of year).
— I’ll be staying more on top of the drillers than usual (I usually stick closer to the E&P and refiners) but suffice it to say I believe the whole drilling group is toppy and while I’d say the onshore guys are more of a sure things than the deepwater drillers (at least in the near term) for a bit of a fall, they’ve been falling fairly steadily for months now so while their fundamentals are definitely under attack, as a play, they probably are already more spent that what I believe will happen to the deeper drillers.