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Spears oilfield services outlook dim

Thu Jun 4, 2009 6:26pm EDT

By Anna Driver

HOUSTON (Reuters) - The 2009 outlook for the oilfield service industry is much worse than expected as companies are hit hard by the steep decline in drilling, especially onshore in the United States, according to consulting firm Spears & Associates Inc.

The global recession has cut into industrial demand and supplies of crude and natural gas have swelled, depressing prices.

"We haven't gone through the downturn long enough for things to get really brutal," Richard Spears, vice president of consulting firm Spears and Associates, said on Thursday at the Reuters Global Energy Summit in Houston.

Revenue for the large global oilfield service companies, which include Schlumberger Ltd (SLB.N: Quote, Profile, Research, Stock Buzz) and Halliburton Co (HAL.N: Quote, Profile, Research, Stock Buzz), will decline 20 percent in 2009, Spears said.

Sales in the second quarter were hit particularly hard, the executive said.

Oilfield service companies, which help energy companies find and drill for oil and gas, are being hit by a "triple whammy," Spears said.

The number of rigs drilling for oil and gas has fallen to a 6-1/2 year low. There has also been a sharp drop in the number of wells that are readied for production and discounts are growing as exploration companies press for price breaks, Spears said.

"Across the board, discounts are massive," Spears said, noting that individual "frac jobs" -- used to increase production -- are now discounted by 65 percent to 80 percent from prices last fall.

And in a few basins, for example North Texas and the Midcontinent, some oilfield service companies are operating at a loss, Spears said.

Still, the U.S. drilling rig count will likely bottom out sometime during the third quarter at about 860 rigs, but it will take a year for the natural gas market to absorb its excess supply.

In Canada, the rig count is likely to increase only about 4 percent to 239 rigs in 2010. In international markets, the rig count is likely to drop nearly 7 percent to 865 rigs in 2010, according to Spears' data.

The drop in exploration has been a response to swelling supplies of natural gas as demand has slumped due to the recession. The U.S. natural gas market is oversupplied by 4 billion cubic feet per day, estimates the Spears firm, which provides market data to energy companies and institutional investors.

(Reporting by Anna Driver; Editing by Phil Berlowitz)

© Thomson Reuters 2009. All rights reserved

Apache sees more industry pain to come

Thu Jun 4, 2009 7:41pm EDT

By Anna Driver

HOUSTON (Reuters) - Oil and gas producers need costs to drop further before they invest in new projects, and their strained budgets will push companies to put assets up for sale, Apache Corp (APA.N: Quote, Profile, Research, Stock Buzz) Chief Executive Steve Farris said on Thursday.

The steep drop in oil and gas prices from the July 2008 highs has prompted producers to slash their spending, forcing oilfield service companies to chop prices for drilling rigs and other activities.

Even with oil prices rising to a seven month high of $68.81 a barrel on Thursday on hopes for an economic recovery that could revive energy usage, weak demand will keep energy prices soft for several months, Farris told the Reuters Global Energy Summit in Houston.

"A lot of people tend to think we've bottomed out, I tend to think otherwise," Farris said. "We're very early in the downturn of our industry."

For example, the Houston-based company has stopped drilling in Oklahoma where it has 1.8 million acres because rig rates are too high, based on current natural gas prices, Farris said.

Rig rates in that market, which peaked at $24,000 per day, are currently at $12,000, but he expects that to fall to $7,500 per day by this summer, more in line with 2004 prices.

Industry cash flows had dropped by about 50 percent since last year, which could prompt integrated energy companies to narrow their list of drilling prospects and reallocate their cash flow to high-value areas, he said.

"People are going to start looking at the things they do well and that they want to (focus) on, and the things that they don't -- including the majors," Farris said. "I think the reality of having $3.81 gas in the third quarter is going to wake some people up in that it's time to start thinking about that."

Farris also said his company was "very acquisitive" and looking to buy assets in the areas where it already operates.

"We like to play to our strengths," he said, classifying Egypt, Australia, Argentina, Canada, central Oklahoma, west Texas, and the shallower part of the Gulf of Mexico as the company's strongest areas.

"All those places we would tack on to," he said.

Apache will decide by October to which liquefied natural gas plant it plans to send its gas produced offshore northwest Australia, Farris said.

"We are talking to two major LNG players in Australia, the Wheatstone project and the Pluto project," he said. "We will probably have to make a decision by October to see which one makes the most sense for us."

The Pluto LNG project, with the capacity to export 4.3 million tons per year (mtpa) of LNG, is run by Woodside Petroleum (WPL.AX: Quote, Profile, Research, Stock Buzz) and is expected to begin production late 2010. The proposed 5 mtpa Wheatstone project is run by Chevron (CVX.N: Quote, Profile, Research, Stock Buzz).

Apache also drilled its best well in the North Sea recently, and should start production in the next month or so, Farris said.

(Reporting by Anna Driver, Eileen O'Grady, Matt Daily and Braden Reddall and Edward McAllister in New York)

© Thomson Reuters 2009. All rights reserved.