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Oil and Gas Drilling: The Price is Right But The Industry's in Trouble

by: Joshua Levine June 06, 2007 | about stocks: OIH / USO / XLE    
Joshua Levine

Joshua Levine

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Strong global demand has consistently kept the price of oil above $50 per barrel. But the price of energy is hardly the only indicator for measuring the real health of oil and gas companies.

Project delays and outright cancellations are having an enormous impact on the viability of energy exploration projects, and are closely linked to a range of critical factors such as drilling day-rates, the cost of rig equipment, and the availability of drilling personnel.

Importantly, ever since the mid-1990s, oil companies have been reducing the percentage of their capital investments for exploration. Yet according to the International Energy Agency, by 2030 the world will be consuming more than 115 million barrels of oil a day, up from 85 million currently.

So why isn’t energy exploration receiving more attention?

A recent ChangeWave survey focused on these and other natural gas and oil exploration issues – including resource shortages, the cost of drilling services and equipment, and personnel. A total of 168 Alliance members who work in the natural gas and oil industry participated.

Tracking Industry Resources and Costs

We began with a look at industry resource shortages:

Which of the following gas & oil industry resources - if any - are currently exhibiting signs of a shortage (i.e. in short supply)? (Check All That Apply)

JL oil 1

Industry resource shortages are still prevalent, with the greatest ones occurring in professional and drilling personnel.

We also asked industry members how current costs compare to those of 90 days ago.

Based on your own knowledge and what you are currently seeing in the industry, would you say the cost of labor, drilling services, drilling equipment and production services is more than it was 90 days ago, less than it was 90 days ago, or the same as 90 days ago?

JL oil 2

Costs are continuing to rise for the majority of companies, with three-in-five (60%) reporting the cost of labor is higher than it was 90 days ago. Similarly, by a wide margin companies say both drilling services and drilling equipment cost more than they did 90 days ago.

Drilling For Answers

To further gauge the impact of prices on drilling we asked:

During 2007, what effect – if any – have prices for drilling services been having on your company's exploration drilling?

JL oil 3

The cost of drilling services is still hurting, with 31% saying it’s decreasing their company's exploration drilling (4% significant decrease and 27% slight decrease).

But is this leading to more postponements or cancellations?

During 2007, has your company postponed or canceled any exploration drilling due to the cost of drilling services?

JL oil 4

Clearly, the costs of drilling are causing more companies to delay or halt exploration drilling. Currently, one-in-five industry members (19%) say their company has postponed or canceled projects due to the price of drilling services – 5-pts more than previously.

Bottom Line

Many of these trends have not just materialized in the past year or two. They have developed over the last two decades.

Nonetheless, too many oil companies are slowing their exploration programs for new petroleum sources.

Ironically, the growing gap between exploration and production is creating a premium for small-to-mid size oil and gas companies with aggressive exploration programs. Investors who make the effort to drill down to these companies are likely to hit a gusher.

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This article summarizes the results of a recent ChangeWave Alliance survey. The Alliance is a research network of 10,000 business, technology and medical professionals who spend their everyday lives working on the front line of technological change. For more info on the ChangeWave Alliance, or if you are interested in joining, please click here.

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This article has 3 comments:

  •  
    Jun 06 08:22 AM
    Not one tier 1 driller oil driller has, particularly offshore, has announced any cancelations. Most all of them have current projects booked thru 2008/9 at higher rates. Given your headline, I find you report to be little more than an attempt to talk down the OIH. The y/y numbers for virtually all of the drillers are increasing at a greater rate than their p/e, i.e. their PEGs are less than 1. Your lack of demographics belies credibility.
    Reply
  •  
    Jun 06 08:50 AM
    I would agree with your comments relative to the interpretation of the data. Some of the conclusions are a bit of a stretch.

    HOWEVER, there is a big item in here that needs to get more play. The personnel issue is getting to be a large issue and will get worse over time (1-5 years). Many of the senior level folks are in the 50-55 year old demographic band and many of these individuals have worked through a period where stock prices have increased. This gives them a nice nest egg to retire on and with interest rate uncertainty, it may be a great time to take that lump-sum retirement package rather than risk a further run up in rates. I see many many more retirements coming in the near future.

    Now, many of these folks won't retire from working; they will become high paid consultants. This will further drive up the cost to do business and put more pressure on budgets. The other issue is the need for people to run the rigs, to throw pipe/iron, etc. There are places where its tough to find good people to work the rigs. This too will get worse. And many who are applying flunk their drug tests. What next? I guess cheap illegal alien labor??
    Reply
  •  
    Jun 06 01:48 PM
    A logical explanation for lack of investment in exploration by oil majors lies in the idea that 80% of the world is controlled by state oil companies and is, therefore, unavailable for competitive investment and drilling. Since future oil finds are likely to be controlled by state companies, oil majors could reasonably either return capital to shareholders through dividends, or alternatively focusing on refining; purchasing crude at market prices and relying on the crack spread for profits.
    Reply
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