High Single-Digit Upstream Spending by Offshore Drillers in Equipment in International Offshore Oil Markets

Wall Street Transcript

67 WALL STREET, New York - February 26, 2013 - The Wall Street Transcript has just published its Oil & Gas: Drilling Equipment and Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs and Equity Analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Capital Expenditures and Consolidation Activity - Frontier Exploration and Development - Shale Drilling Capital Expenditures - Oil Price Expectations - Shale Drilling Dynamics - Shale, Offshore and Deepwater Drilling - Oil and Gas Price Divergence - Offshore Deepwater Oil Discoveries

Companies include: Schlumberger Limited (SLB), Baker Hughes Inc. (BHI), Halliburton Company (HAL), Weatherford International Ltd. (WFT), Diamond Offshore Drilling Inc. (DO), Ensco International Inc. (ESV), Noble Corp. (NE), Transocean Ltd. (RIG), Rowan Companies Inc. (RDC), Cameron International Corporat (CAM), FMC Technologies, Inc. (FTI), National Oilwell Varco, Incorp (NOV), Helmerich & Payne Inc. (HP), Nabors Industries Ltd. (NBR), Patterson-UTI Energy Inc. (PTEN), Petroleo Brasileiro (PBR) and many more.

In the following excerpt from the Oil & Gas: Drilling Equipment and Services Report, an expert analyst discusses the outlook for the sector for investors:

TWST: What's holding you back, at least relatively, in the other subsegments?

Mr. Gruber: Obviously, the offshore drillers and the capital equipment names participate in the offshore markets in a very big way. There is strength across the board, and we generally see high single-digit upstream spending internationally, levered to the offshore markets, where we have about 18% growth in deepwater spending. But the key metrics for the different segments have moved at different times, especially if you can compare this cycle to those of the past.

This cycle - the ordering of new offshore rig equipment began in earnest very early in the cycle, following the Gulf oil spill. The emphasis was on new equipment, enhanced operating efficiency and safety. The rig orders started to flow very early in the cycle, and then they were accentuated by Brazil's effort to build 29 rigs in-country to support their offshore drilling program. We think the rig order trend continues, but at a reduced pace, and that's going to be a headwind to backlog growth for a company like NOV.

Within the equipment space, I think the Cameron story is interesting because you gain exposure to growth and production equipment at a much cheaper price than FMC. Within offshore drillers, rig rates started moving early in the cycle. I think they've reached their peak within the deepwater in the low $600,000 a day range, and I just don't see much upside from there because they're generating very good returns on incremental investment.

Within the drillers, our recommendation is to identify companies that will be increasing cash return. Some companies, such as Seadrill and Diamond, already have very healthy payout ratios, and we don't see those improving materially over the course of 2013 and 2014. Other companies, such as Rowan, are in the investment phase, so the prospect...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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