Near-Term Pricing And Rig Count Forecasts - Philip H. Weiss - Argus Research Company
July 21, 2010 - The Wall Street Transcript has just published Oil and Gas Production and Distribution Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Philip H. Weiss is a Senior Analyst covering the energy sector at Argus Research Co. Prior to Argus, he worked as a Senior Institutional Writer for T. Rowe Price, where he wrote commentary for several of the firm's investment strategies and white papers on investment-related topics. Mr. Weiss also worked as a Writer/Analyst/Co-Portfolio Manager for The Motley Fool's Cash King/Rule Maker Portfolio. In this capacity, Mr. Weiss primarily wrote company-focused reports and columns discussing accounting/financial/earnings manipulation. He began his career with Deloitte & Touche, where he specialized in international tax research and planning, and subsequently worked for Fortune 500 firms in the health care and business-to-business industries. Mr. Weiss holds a B.S. from Rutgers University. He is a CFA charterholder, a CPA in New Jersey and a member of the Baltimore Society of Security Analysts.
TWST: Let's step back and look at the current state of the industry. What is going on in the E And P space? Is it still as active as it was one or two years ago?
Mr. Weiss: If we go by the rig count, it's probably more active than it was a year ago, but less than it was two years ago. Spending in 2009 was down from 2008, but with prices, at least on the oil side, relatively robust. Activity in 2010 is up so far and is estimated to rise about 10% for the full year. I do harbor some concerns that the second half of the year could be a little weaker than the first half.
TWST: On the pricing side, a large amount of unconventional gas has been found, correct? Is that enough to keep a lid on things?
Mr. Weiss: There has been a lot found. As I was alluding to before, you have a lot of activity that's going on because over the last couple of years, companies have gone pretty aggressively after leases. And now they have all these leases and they want to keep them, so they're drilling to protect those leases. But even in the current environment, I don't think that $3, $4 gas is enough to support that activity over the long haul. Some of the production is protected by hedges and things like that, too. But with the price environment that we've had so far this year, I don't believe that there's been a lot of additional hedging activity this year. So based on where we stand today and where I expect us to be over the rest of this year and most of 2011, there's not a way to add more hedges and provide similar benefits to what companies have generated this year. I think that we need natural gas prices in the $5 to $7, if not $6 to $8, range to really support overall activity. The first activity to get cut out is certainly going to be the conventional production side.
TWST: Given what's going on with the drill rigs out there, what will happen with day rates? Are they holding up pretty well?
Mr. Weiss: On the jack-up side, rates have fallen pretty sharply. It seems as if they've kind of stabilized, but they're certainly well below where they were, and utilization is much lower. On the deepwater side, the last fixtures that we had were probably in the $450,000 to $500,000 range, which is again below peak. And right now, before this incident happened, it was like this game between the two sides, where the integrated and the national oil companies seemed to be holding out to get a lower price, and the rig providers were holding out to try to get a higher price. And neither side really gave in because the people with the rigs are primarily booked for this year and mostly next year. So nobody has been in a hurry to reach a deal. And then you have both sides kind of holding out, and we haven't seen where that next fixture is going to fall to have an idea. I suspect that we'll still have prices in the $400,000 to $450,000 range, but this incident in the Gulf and any changes it brings about could change that.
TWST: With high oil prices, the companies must be generating pretty good cash flow. Where is it going? Is it going into E And P?
Mr. Weiss: I think a lot of it is cap ex. The bulk of cap ex spending by the integrateds is certainly going into E And P activity. Cap ex on the refining side is down pretty dramatic because the downstream environment is so weak. Most companies are more or less limiting downstream cap ex to maintenance levels. On average, 75% to 80% of cap ex for integrateds is allocated to upstream activities. Another thing companies have done where they can is - the big push right now is towards more liquids production. It's the wet-gas plays, like the Eagle Ford and the Granite Wash, and places like that, where you are not just getting dry gas.
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