Energy costs

Land drillers are not yet out of the woods, or so it would seem


Shares in onshore drilling contractors have rallied alongside natural gas prices, but some say it’s too early to call a recovery in the market that has been dogged by overcapacity. Land-based drilling companies have outperformed most oilfield service companies this year, as cold winter weather and smaller-then-expected imports of liquefied natural gas have pushed gas futures prices up nearly 40 percent.  

But so far, there are only small signs of life in the US onshore markets, suggesting that the stocks may have gotten ahead of themselves.

“While we can’t blame most for jumping on the bullish bandwagon, our view is that natural gas prices will still fall this summer,” Raymond James wrote in a note to clients in late March. “This should drive activity lower and leave the market oversupplied and overly optimistic.” As a result, Wall Street earnings estimates are too high and need to be lowered, the firm said.  

Raymond James sees higher imports of LNG and increased production weighing on natural gas prices in coming months, although the research firm has become less bearish in it’s outlook due to the winter’s colder than expected weather. Still, shares of Nabors Industries Ltd are up 15 percent this year, Grey Wolf Inc has risen 15 percent, Patterson-UTI Energy Inc is up 16 percent and Pioneer Drilling Co has climbed 25 percent.

By comparison, an index of drilling companies which includes offshore drillers GSPOILD is up about one percent on the year. In January, analysts had forecast gas prices would average $7.30 per thousand BTU, up from $6.95 in 2007, although many experts have raised their expectations by about $1 in since the start of January because of strong demand.

Too early
Carl Blake, senior high-yield analyst with corporate bond research firm Gimme Credit, said it is too early to call a recovery in the land drilling sector. “I think you’ll need to see natural gas prices sustainable at higher levels before you see companies expanding their capital budgets,” Blake said.

The budgets of smaller oil and natural gas exploration companies will be more sensitive to the ups and downs of natural gas prices, while larger companies are more likely to stick to their capital expenditure plans, the analyst said.

The market will also need to see storage levels decline below historical averages to sustain higher natural gas prices, Blake said. And while the rate of decline in prices for drilling rigs has slowed, prices are still down four percent in the first quarter, according to data from energy analysis and advisory firm Spears and Associates Inc.

In a recap of an investor conference held in Las Vegas in early March, Simmons & Co said there were about 400 land rigs not working in the US market, suggesting an 80 percent industry utilisation. Historically, Simmons said, 85 percent utilisation is needed for higher prices.

Exploration and production companies are still acting cautiously and not signing term contracts, although there are some inquiries about long-term prices, Simmons said. But some argue that the worst times for the US land drillers are in the rear-view mirror.

“We have been very surprised that the land dayrates have not fallen further,” Richard Spears, vice president of Spears and Associates Inc, said. “While you can certainly find 200 rigs lying in the grass not doing anything, it looks like the industry is stabilising at around $20,000 per day.”

Currently, dayrates for rigs in the US are around $20,000, up substantially from the lows of $10,000 to $11,000 in 2003 and the beginning of 2004, Spears said. In a meeting with investors in March, Mark Siegel, the chairman of Patterson-UTI, said that he sees the market “more in balance and more stable” than it has been before, and natural gas and oil markets are likely to remain favourable in the long-term.