Spill Clouds Future for Service Providers

HOUSTON (Dow Jones Newswires), May 19, 2010

The massive oil spill in the U.S. Gulf of Mexico, which has resulted in a temporary ban on new drilling, is clouding the immediate future for oilfield-service providers--but could be profitable for them in the long term.

Investigations into the events surrounding an April 20 explosion and fire that sank the Transocean rig Deepwater Horizon will likely lead to more strict regulation of the U.S. offshore drilling industry, ratcheting up costs and safety standards. This increased
scrutiny has the potential to increase the role that oilfield-service providers, which provide project management and technological support to energy companies, play in drilling projects. But at the same time, the extent of the new regulations and increased delays for new projects could weigh on service-company profits in the near future.

"I don't think in the near term this is good for service companies or the industry because operations are disrupted," said Gene Shiels, a spokesman for Baker Hughes, which provides directional drilling services and drilling fluids for offshore drilling projects.

But Shiels added that in the long term, heightened standards for back-up systems or requirements to add more equipment to existing rigs could create opportunities for service companies.

Companies that could benefit are Schlumberger and Halliburton, which provide equipment and services for offshore drilling.

Fadel Gheit, an analyst with Oppenheimer in New York, said service providers "will have more frequent interactions with the
operator." Gheit noted that those oil and gas producers would have to pay for interactions.

The increasing uncertainty affecting offshore drilling casts an unexpected shadow on the sector's fortunes, which rode high even amid
the recent recession due to oil companies' pressing need to grow their dwindling energy output. Drilling contractors such as Transocean and Noble, used to charging nearly half a million dollars a day for contracting out each of their hi-tech drilling rigs, are already facing more stringent safety inspections. Contractors also face an immediate threat from the spill itself as it expands across the Gulf and surrounds more drilling rigs, which could force some to declare force majeure and cease operations in the area, say analysts with Tudor Pickering Holt. Transocean couldn't be reached for comment, and a Noble Corp. spokesman said it was too early to speculate on the long-term effects of the spill on the industry.

In the near term, drilling contractors and service companies also face a moratorium on new drilling permits until the U.S. government
completes an investigation of the Deepwater Horizon incident. That review is expected by May 28, but it's unclear whether the ban will be lifted then.

"We don't know what this moratorium is going to do and how long it is going to last," said Bill Herbert, an analyst with the Houston-based energy investment bank Simmons & Co.

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