ANALYSIS-New onshore US drilling rigs deliver high margins, for some
Dec 20 (Reuters) - A new generation of land-based oil and gas rigs is halving drilling time and cutting costs for customers, but also setting a clear divide for investors between firms that have the new machines and those stuck with hundreds of old ones.
About two-thirds of the 1,750 active land rigs in the United States are legacy diesel-powered units. The rest are the newer machines that have alternate current (AC) motors.
Driller Helmerich & Payne Inc, which dominates the AC rig market with a share of about 40 percent, is the biggest beneficiary of the move towards more efficient equipment and is enjoying much higher operating margins as a result.
In contrast, drillers such as Nabors Industries Ltd and Patterson-UTI Energy Inc face scrapping many old rigs as there are few buyers for them.
Fleet upgrades are costly -- new rigs can cost anywhere from $10 million to $50 million -- and phase-outs of older rigs will result in writedowns. But drillers can't afford to stand still, analysts said, as gas and gas liquids prices are expected to stay depressed, making cost cuts crucial for energy producers.
"Smaller companies have sold older rigs for little more than salvage value, while larger companies have been hanging on to them since they haven't needed cash as much," said Tim Parker, who manages T. Rowe Price's natural resource stock portfolios.
Shares in Helmerich, whose customers include Occidental Petroleum Corp, Marathon Oil Corp and Devon Energy Corp, have jumped 22 percent in the past six months, and analysts and Thomson Reuters data suggest there is potential for further gains.
Based on Thomson Reuters' StarMine Analysts Revision Model (ARM), a measure of change in analyst sentiment, Helmerich ranks highest among its peers. Helmerich's ARM score is 88 out of 100, compared with 4 for Nabors. Patterson-UTI has a score of 20. < ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ GRAPHIC-New rigs, good margins r.reuters.com/ryh74t GRAPHIC-Fewer rigs due to weak gas r.reuters.com/dyb62s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Nabors and Patterson-UTI are also seeking more efficient AC rigs, a development that is expected to send most of their older rigs out of service in the next few years, analysts said.
"It seems unlikely there will be much of a market for older rigs, so ultimately I'd expect them to be scrapped," said Philip Weiss, a senior energy analyst with Argus Research in New York.
Some 300 older rigs are already lying unused in North America, made even more uncompetitive by falling gas and gas liquids prices that have cut overall drilling activity.
The U.S. land rig count has fallen 11 percent from a year ago, according to data compiled by Baker Hughes Inc.
Helmerich's operating margin is twice that of Paterson-UTI and nearly eight times that of Nabors, but its advantage will gradually erode as rivals take delivery of about 50 new rigs next year.
There are currently about 600 new-generation rigs working in the United States.
Precision Drilling Corp, Canada's largest oil and gas drilling contractor, said earlier this month it would decommission 52 of its older rigs and take a related charge of up to C$200 million ($203 million)in the fourth quarter.
"While some legacy tier-3 rigs may have market niche opportunities, the drilling industry's growth and success will be driven by improved drilling efficiency, safety performance and environmental responsibility," Chief Executive Kevin Neveu said.
RUSH TOWARDS EFFICIENCY
"Older rigs are going to have an increasingly difficult time being competitive/finding work as we go forward," said Argus Research's Weiss.
The preference for more efficient rigs has particularly helped Helmerich, which has a market value of about $6 billion.
The 22 percent jump in its shares over the past six months is more than twice the 9 percent gain in the Thomson Reuters United States Oil & Gas Drilling Index, which includes both onshore and offshore drillers.
Helmerich's stock has room to rise further, investors and analysts say, as the company's 250 high-specification AC rigs give it an edge over rivals.
"While others are also building new rigs, HP went in this direction sooner and more fully than its peers, allowing most of its fleet to be modernized and enjoy higher utilization and margins," said T. Rowe's Parker, whose firm had investments in Nabors, Helmerich and Schlumberger Ltd as of Sept. 30.
More than 80 percent of Helmerich's fleet is made up of AC rigs, which the company says can save up to 38 percent on drilling costs per well despite commanding daily rates that are up to 20 percent higher than those for conventional rigs.
About 37 percent of Nabors rigs are AC units while a third of Patterson-UTI's fleet is made up AC machines.
"We will continue on a two-rig-per-month build program to get us to 126 APEX (high-specification) rigs by the middle of next year," CEO Andy Hendricks said in a presentation this month. The company had 107 of those rigs as of Sept. 30.
Helmerich makes its own rigs but others rely heavily on National-Oilwell Varco Inc, the largest U.S. oilfield equipment maker, so it also stands to benefit from the new technology.
Shares of the equipment maker, which has posted better-than-expected results for the last six quarters, have risen nearly 5 percent in the past year. Its backlog of rig orders, both onshore and offshore, rose 13 percent in the year to Sept. 30 to $11.7 billion.
Patterson-UTI declined comment for this article, while Helmerich pointed to its presentation on its rig fleet. Nabors did not respond to emails seeking comment. ($1 = 0.9869 Canadian dollars) (Additional reporting by Swetha Gopinath; Editing by Rodney Joyce and Ted Kerr)
- Tweet this
- Share this
- Digg this