Rising Rig Rates, E&P Spending Lift Oil-Service Cos

LONDON, Jun 30, 2005 (Dow Jones Commodities News via Comtex) -- By Leia Parker Of DOW JONES NEWSWIRES The rates for these semisubmersible rigs are hovering around $350,000 a day, but competition among oil companies will keep the pressure on, Proctor told Dow Jones Newswires.

Industry analysts concurred, pointing to rising worldwide offshore rig utilization and increased spending on exploration and production as companies seek to replace reserves or tap new supply.

But these barometers of oil-service-company performance also are seen as indicators of future supply. A U.S. energy advisory firm last week said that increased investment in oil capacity will likely bring on a supply glut and weaken prices later in the decade.

For now, the market's strength is driving oil companies to lock in longer terms for drilling rigs and creating opportunities for oil-service companies like Hunting to fund acquisitions, Proctor said.

"The oil and gas industry is demanding more capacity, and it's willing to back up that request with long-term contracts," Proctor said.

Worldwide offshore rig utilization strengthened to 88.8% this week from 82.3% in June 2004, and the rising demand will extend the surge in rig rates, Lehman Brothers analysts said this week in a research note.

"Rates have shown limited signs of slowing, and given strong global rig demand and limited rig capacity, we believe rates will continue to rise," the Lehman note said. "However, we ultimately expect the pace of acceleration to slow from today's rapid pace."

A Lehman survey of 356 companies also suggested worldwide exploration and production spending this year will rise 13.4% from 2004 levels. Lehman analysts suggested the spending spree could be even greater if commodity prices remain at today's levels. They projected the strength for oil-service and drilling companies will continue in 2006.

In the U.K., London-listed Hunting PLC said Wednesday it plans to exploit the sector's strength through a rights issue that would raise GBP45.7 million to finance acquisitions and an annual increase of GBP15 million this year in its capital-spending plan.

Hunting plans to finance "bolt-on" acquisitions that complement its Hunting Energy unit, which supplies tubular components and accessories for oil and gas wells, Proctor said.

But Cambridge Energy Research Associates, a U.S.-based energy advisory firm, said last week that increased investment could weaken prices and oversupply the oil industry later in the decade.

In a detailed, field-by-field analysis of the world oil industry, CERA analysts said global oil-production capacity could rise by as much as 16 million barrels between 2004 and 2010, leading to an oversupply of 6 million to 7.5 million barrels a day.

The resulting supply increase should ease the "razor sharp" global balance behind oil price increase of recent years and push oil prices below $40 a barrel, the analysts said.

Proctor takes a more bullish view. Major oil companies' widely reported struggle to replace their reserves and the Organization of Petroleum Exporting Countries' difficulty in keeping pace with current demand suggest to him oil prices should remain strong, he said.

Major oil companies seeking acquisitions to book additional reserves have seen the cost of such deals rise along with oil prices. That trend also is seen spilling into the oil-service sector, said John Westwood, chief executive of Douglas-Westwood, an energy analysis firm in Canterbury, England.

"We're in a period now where the prices of those acquisitions have gotten very high indeed," Westwood said. "The same situation will start applying to the oil-service companies very, very quickly."

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