Dain Energy Conference Notebook: Tough Times for Land Drillers

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HOUSTON -- As far as some industry insiders are concerned, the aberration in the onshore contract drilling business has not been the last nine months, with the steep drop in oil prices. The aberration was the last six months of 1997, when times were good.

With levels of rig utilization onshore in the U.S. hovering around the 50% mark and dayrates a little more than half what they were a year ago, the bright spots in Thursday's presentations by many of the land-drilling contractors at

Dain Rauscher Wessels'

Energy Conference here were few and far between.

Sure, there was a bit of good news: Natural-gas drilling has held up relatively well; balance sheets are strong; there's a lot of consolidation still to be done and technological advances on the drilling side continue.

But most of the presenters foresaw several difficult quarters before a slow recovery in oil prices and dayrates. As James Brown,

Patterson Energy's

(PTEN) - Get Report

chief financial officer, said, "I don't believe this is going to last a long time, and I don't believe this is another 1986," referring to the big industry drought of the 1980s. "But from a bean counter's standpoint, it sure feels that way sometimes."

Each of the presenters tried to differentiate their fleets, companies and operations, some more successfully than others. For instance,

Helmerich & Payne

(HP) - Get Report

and

Pool Energy Services

(PESC)

have large land-drilling fleets, but their oil and gas exploration, offshore operations and other services have insulated them somewhat from the woes surrounding the domestic land-drilling industry. Here are some highlights.

Some earnings estimates for this year's second half may be too high, said James Brown,

Bayard Drilling's

(BDI)

chairman, president and chief executive. And the already low estimates for 1999 could fall even more if conditions stay the same, Brown added. But for his own company, he said, the expected poor results of the next two quarters are not indicative of the company's true earnings power.

According to

First Call

, analysts expect Bayard will lose 3 cents this quarter and a penny in the fourth quarter, with earnings rising to 14 cents next year.

Brown's point was that Bayard's fleet of technically advanced rigs that focus on drilling deeper wells, mostly for natural gas, is well-situated for a turnaround. Brown added that no operators have actually stopped production from natural-gas wells in the last couple of years, a bullish sign. In addition, one of the primary drivers for natural-gas demand is the increasing use of the commodity by utilities. In June, Bayard bought 25 rigs and other drilling equipment from

Trans Texas Gas

(TTG)

, bringing its total fleet to 87 rigs, 73 of which are working.

"Conditions are difficult, very, very difficult," he said. He expects the industry's difficulties to continue into 1999 and then begin improving. Bayard's revenue for the first six months of 1998 was $44 million, up from $15 million in the first six months of 1997.

UTI Energy

(UTI) - Get Report

also derives the bulk of its drilling revenue -- about 74% -- from natural gas. Total revenue was $182 million in 1997 and 96 million for the first six months of this year.

Mark Siegel, UTI's chairman, pointed out how fragmented the onshore drilling industry remains. The five public contract drillers own just less than half of the total land-drilling fleet of about 1,400 rigs, of which 1,050 are classified as ready and available to work. UTI plans to continue to consolidate the industry, acquiring competitive companies in new markets and retaining good local management.

In addition to the large degree of fragmentation, another fundamental aspect of the land-drilling industry in the U.S. is the decreasing supply of rigs. Attrition and more attractive international markets are taking about 50 rigs a year out of the market and no new rigs are being built. Right now that is a plus. Thomas Richards,

Grey Wolf's

(GW)

president and CEO, later estimated the oversupply of U.S. land-drilling rigs at 200 to 250 rigs.

For the first six months of 1998, UTI's utilization averaged about 60% for its fleet of 109 rigs but has since dropped down to the upper 50% range.

Richards at Grey Wolf says he has seen the lows in this business and knows how to react accordingly, including managing the business within its cash flow. He also talked about Grey Wolf's "substantial" earnings potential and said GW will be around when the business turns around.

But the fact is Grey Wolf has had only six profitable quarters out of the last 24, and four of those were in 1997. Consensus estimates call for a loss of 8 cents this year, and a loss of 6 cents in 1999.

Grey Wolf has taken steps to combat the cost side of its operating equation. By cold-stacking rigs, or taking them off the market, it reduces labor, overhead and maintenance. Richards said the company has taken steps to reduce its daily rig-operating costs

A year ago, the excitement enfolding the oil-service industry had some talking replacement economics for rigs drilling on land. Dayrates were climbing to the $10,000-per-day level, and the rig-equipment market for this segment was tightening. Grey Wolf, with a new name and logo and lots of rigs it had acquired through a string of acquisitions, was trading above 7 (it was a featured stock in

TheStreet's

$10 Store last September), even hitting 10 at one point. The stock has since tumbled to 1 1/2, just about its book value.

The fastest rising expense Grey Wolf has is its interest expense, which jumped 534% in the second quarter, to $5.5 million, from $863,000 a year earlier. This was primarily due to the increase in Grey Wolf's long-term debt from two bond offerings of $175 million and $75 million.

Despite the oil-price slide this year, Helmerich & Payne's continues to have stability in its earnings power, said George Dotson, vice president of finance.

Earnings will fall only 4% this year. Analysts expect the company will earn $1.57 per share this year, according to First Call, down from $1.64 last year. As opposed to driving down the drilling cost per day, H&P's philosophy is to add value in the drilling process, saving time for the producer, with cost savings following from reductions in drilling time. H&P invests in technology, working on automating more of the drilling processes.

Total revenues grew to $518 million in 1997 from $393 million in 1996. Only 61% of H&P's revenues stems from drilling business, both onshore and offshore, with the greater bulk coming from international operations in Venezuela and Bolivia. The rest comes from oil and gas exploration and production and natural-gas marketing.

Like H&P, Pool Energy Services has diversified its operations to include land drilling, offshore drilling and marine supply boats, but its largest division is well servicing, or maintenance and overhaul.

It's only been in the third quarter that business for the company's 21 rigs in the Gulf of Mexico (including six jackup rigs and 15 platform rigs) began to feel the downturn, said Jim Jongebloed, Pool's chairman, president and CEO. Overall earnings are falling, to a projected $1.09 a share this year from $1.31 in 1997. According to First Call, 1999 earnings estimates stand at $1.03 a share.

In March of this year, Pool stepped into the marine supply-boat industry through its purchase of

Sea Mar

. It acquired 23 marine service boats for $126 million -- shortly before dayrates in the supply-boat business turned sharply lower. Jongebloed pointed out Sea Mar's strength -- that all of its vessels recently completed refurbishments and upgrades, giving the company a competitive advantage. Although this will reduce Pool's capital expenditures on repairs for these vessels in the future, for the next several quarters a refurbished vessel is not likely to fetch a higher dayrate than the same vessel that might be 15 years old.

Pool has also recently been awarded contracts in Alaska's North Slope region, which will bolster operations and revenues from that region, Jongebloed said. "We weren't sure about the success of that operation before."