Analysts See Slow Recovery for US Drillers; 2008 is Looking Up

HOUSTON May 17, 2007 (Dow Jones Newswires)

Even self-proclaimed optimists say they aren't quite ready to predict a recovery in North American land drilling by the end of the year.

"I'm very bullish on 2008," said Marshall Adkins, an analyst for Raymond James & Associates in Houston, who prefaced his remarks by noting that he's been bullish on the energy sector for most of the last decade.

For the moment, however, flat exploration activity in the U.S. and Canada, combined with the entrance of hundreds of new rigs into the market, are weighing on drillers' margins. Although both countries are seeing diminishing returns from oil and natural gas reserves, more rigs are operating in the U.S. alone than the rest of the world combined. Producers accepted skyrocketing drilling costs while natural gas prices were rising, but this year have capped their budgets in North America, as gas has settled between $7 and $8 a million British thermal units. With more rigs competing for the same number of jobs, the prices drillers can charge, known as dayrates, have fallen by about 20% this year.

Declining production and increasing demand in the U.S. should lower gas inventories by the fall, helping natural gas break out of its current range, Adkins said, speaking at a land drilling conference in Houston.

Adkins predicts $10/MMBtu in 2008, and "wouldn't be surprised" if gas reaches $15/MMBtu. Either price would be more than enough to get producers to open up their wallets for drilling again, he said.

Dan Pickering, of Pickering Energy Partners in Houston, gave a less buoyant view. Dayrates should hit an equilibrium in 2008, he said, but a return to the heady prices of 2005 and 2006 is not a guarantee. Gas prices should balance out between $8/MMBtu and $9/MMBtu, enough to absorb the estimated 220 new rigs expected to enter the market this year, he said.

"Still, if this is a slowdown, it's a pretty fun slowdown to be involved with," he said, noting that dayrates and activity levels remain high by historical standards.

Under Pickering's scenario, new rigs will find work easily, but will crowd out older equipment. Companies that put in massive rig orders before this year, such as Helmerich & Payne, Inc. (HP) and Nabors Industries Ltd. (NBR), will benefit, he said.

Attendees at the event, hosted by the International Association of Drilling Contractors, seemed to fall somewhere between Adkins' and Pickering's views.

"Our business is still looking pretty good," Helmerich & Payne Vice President for U.S. Land Operations Jeff Flaherty told the gathering. "Hopefully (the downturn) is not the end of our newbuild program."

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