Big Oil profits trickle down to service firms

While Big Oil companies have been reporting record profits for several quarters, the gravy has just begun trickling down to service companies.

Oil prices topping $50 per barrel are boosting independent driller earnings, and rental rates for drilling equipment in the Gulf of Mexico are

We've seen the day rates on rigs go up in just about every area, said Lanny Pandhill, an analyst with the St. Louis investment company Edward Jones. Day rates are the daily rental rates for drilling equipment.

The service companies are just now beginning to see some pricing power within the industry, Pandhill said.

The U.S. Gulf of Mexico Jackup Day Rate Index, compiled by Oslo, Norway-based ODS-Petrodata, stands at 232 this month, the highest level since September 2000 and more than double the activity of 10 years ago. ODS-Petrodata charts day rates by setting the average market day rate in January 1994 equal to 100.

Demand from China and India is likely to keep oil prices high in the near term, Pandhill said. Despite high prices, U.S. demand for oil hasn't slowed, he said.

From the bigger picture, you need to consider we use about half as much energy today as we did in the late 1970s to produce the same unit of goods, Pandhill said. We have become much more efficient and the economy we now operate in is really a service economy. The bulk of the gross domestic product is coming out of the service sector, which runs on people, not oil.

New Orleans-area oil companies are reaping the benefits.

Harvey-based Superior Energy Services Inc. reported a record first quarter with earnings up 378 percent to $17.2 million from $3.6 million in the first quarter of 2003. Rising rental rates for rigs and drilling equipment fueled those numbers.

Superior's liftboat fleet use rate was 77 percent in the first quarter compared with 64 percent in the first quarter of 2004 and 76 percent in the fourth quarter of 2004.

Superior has been able to charge daily rental rates ranging from $3,297 per day for a 105-foot liftboat, a 21 percent increase over last year's rates, to $20,305 per day for one of the company's 250- foot liftboats, a 34.4 percent increase over last year's rates.

At this time last year, Superior was getting $2,708 per day for a 105-foot liftboat and $15,105 for a 250-foot liftboat.

Increased revenues from Superior's drilling equipment rental business contributed to those record results.

We have been able to increase our back-end rates, which are rates for items such as pumps, as well as weather standby rates, said Superior CEO Terry Hall. Weather standby rate (the rate companies pay when a vessel isn't operating due to bad weather) is currently 75 percent, where as before we were giving a 50 percent discount.

At offshore supply vessel fleet operator Hornbeck Offshore of Covington, first-quarter earnings of $5.2 million were up 126.1 percent from $2.3 million earned in the first quarter of 2004.

Quarterly revenues jumped 21.1 percent to $37.9 million. The $6.6 million increase was driven primarily by improved offshore supply vessel market conditions in the U.S. Gulf of Mexico, company officials said.

Hornbeck's average daily rental rate for offshore supply vessels was $11,577 for the first quarter, a 20.2 percent increase from $9,629 this time last year. Nearly 95 percent of Hornbeck's fleet is in use compared with just 78.4 percent at this time last year.

Demand for drilling equipment is even stronger at Houston-based Rowan Cos. where offshore rig use was 98 percent during the first quarter compared with 99 percent in the fourth quarter of 2004 and 84 percent in the first quarter of 2004.

Rowan's average Gulf of Mexico day rate for drilling rigs during the first quarter was $58,000, up $7,400 from the fourth quarter of 2004 and $18,300, or 46.1 percent, from the first quarter of 2004.

Our drilling fleet has been almost fully utilized over the past 11 months and our average day rate continues to improve with each new assignment, said Rowan CEO Danny McNease. We have commitments in hand for rates never before achieved in our long history of drilling in the Gulf of Mexico.

According to Rowan officials, the number of older drilling rigs leaving the market in the next few years could outpace the number of new rigs coming into the market, which would keep day rates high.

Eventually, the price of oil will come down, Pandhill said. He warns that although integrated companies are fairly insulated from swings in the price of oil, smaller companies are still at the mercy of the markets.

We certainly expect the independents to outperform in today's environment because we've been on an upward climb in terms of oil prices, but that will end some day, Pandhill said. When prices start coming back down, they are the ones that fall the farthest and the fastest.