Oil service firms brace for drilling slowdown

Raymond James analyst downgrades oil service sector as US well drilling slows

Associated Press

NEW YORK (AP) -- Shares of oil services company slid on Monday, as tumbling oil and natural gas prices point to tougher times for well drillers and other companies working with the petroleum industry.

Companies like Ensco PLC, National Oilwell Varco Inc. and Noble Corp. make money by mapping underground reservoirs, drilling wells, fixing equipment and providing a host of other services to oil and gas companies. Demand for those services has declined as prices fall and companies idle operations at some U.S. wells.

The price of benchmark U.S. crude has dropped by 23 percent since peaking in February above $109 per barrel. Prices fell this year on growing concerns of a European financial crisis that could reduce demand. On Monday afternoon the price of crude was down 30 cents at $83.73 a barrel.

Natural gas also has been on the decline this year, falling to a 10-year low in April, as a jump in domestic production and a relatively mild winter boosted supplies.

Raymond James analyst J. Marshall Adkins expects the number of active U.S. land-based rigs to fall by 500, or roughly 25 percent, from now until the end of 2013. With fewer rigs operating, service companies will have a tougher time finding work and they'll likely cut prices to get business. That means lower profits are likely across the industry.

"We believe that U.S. drilling activity must eventually come down in order to rein in supply growth to help balance the market," Adkins said in a research note on Monday.

He downgraded 10 service companies. Ensco, National Oilwell, Noble Corp., Ocean Rig UDW Inc., Patterson-UTI Energy Inc., and Superior Energy Services Inc. were dropped to "Outperform" from "Strong Buy." Hercules Offshore Inc. and Key Energy Services Inc. were downgraded to "Market Perform" from "Outperform." He moved Basic Energy Services Inc. and Global Geophysical Services Inc. to "Underperform" from "Market Perform."

In afternoon trading Ensco shares were down about 1 percent at $43.51, National Oilwell fell 2.1 percent to $66.44, Noble Corp. was off almost 3 percent at $30.67 and Ocean Rig lost 2.3 percent at $13.02. Patterson-UTI, fell about 1 percent to $13.91, Superior Energy dropped 4 percent to $18.81, Hercules Offshore was down about 10 percent at $3.11, Key Energy down 5.5 percent at $8.97, Basic Energy off 4 percent at $9.46 and Global Geophysical fell about 7 percent to $6.79.

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