The Wall Street Transcript Exclusive Interview: Strong Rig-Build Cycle And Shift Toward Higher Specs - Edward C. Muztafago - Societe Generale

Wall Street Transcript

67 WALL STREET, New York - March 14, 2012 - 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, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Strong Demand for Higher-Specification Rigs - Drilling Shift From Gas to Liquids - Offshore Deepwater Oil Discoveries - Shale Drilling Dynamics

Companies include: Aker Kvaerner (AKSO.OL); Cameron International (CAM); Anadarko (APC); BP (BP); Baker Hughes and Weatherford (WFT); and many more.

In the following brief excerpt from the 37 page , interviewees discuss the outlook for the sector and for investors.

EDWARD C. MUZTAFAGO is a Vice President of Investment Research at Societe Generale. He follows the U.S. oilfield services and equipment sector. Prior to joining SG in 2010, he worked at Citi Investment Research & Analysis in the oilfield services and equipment sector since late 2006, most recently as a small- and mid-cap Analyst. In 2008, the team was ranked number three by Institutional Investor. From 2005 to 2007, he worked for the energy investment boutique firm Pritchard Capital Partners, LLC. Mr. Muztafago holds an MBA in finance and an M.S. in international business from Seton Hall University's W. Paul Stillman School of Business, and he graduated cum laude with a B.S. in economics.

TWST: Some news outlets have reported that the unusually warm weather has not been kind to the drilling industry. Is that true?

Mr. Muztafago: The reality is, it hasn't been kind to the stocks, but the actual industry itself has fared relatively well. I think there is really a bit of a misperception on the part of buy-side community right now that the weak natural gas prices are going to cause some precipitous collapse in drilling activity. Unlike the past cycles, this cycle is very much driven by oil and liquids, or oil, natural gas liquids, NGLs, and oil condensate. The economics of that clearly are much better than natural gas prices would indicate. If you look at Baker Hughes' (BHI) rig count, what it says is that 40% of the rigs in the U.S. are still drilling for gas, but in reality we think probably anywhere between 40% to maybe on the outside 50% of those rigs are really drilling very heavy liquids-rich targets. So it's a little bit of a loose correlation to say that the economics of those rigs are driven by the weak gas prices. They're really driven by liquids, and whether condensate or NGL, it's priced off of oil. And so that can materially alter the economics of drilling new wells.

TWST: Let's do both. Let's start with the drilling.

Mr. Muztafago: Obviously on the drilling side, capital is a yearly requirement. So with oil prices at $100 WTI and Brent another $10, $15 north of that, I think the capital to meet drilling programs for most of the IOCs, or international oil companies, and NOCs, the national oil companies, is not really an issue. As far as the upgrading capital goes, for most rig contractors that clearly I think is there, but it will certainly take a chunk out of cash flows.It's very apparent that there was lot of underinvestment in the offshore rig fleet during the good years of 2005 through 2008 when day rates were running up. It makes a lot of sense, because when you look at contracts on a lot of these deepwater rigs, they had bonus revenues associated with them. Basically what it means is that, if you can get a rig to work, 93% of the time you'll get an extra so many percent on top of the day rate that rig earns. And those bonus revenues can range anywhere between 5% to 15%, and a little above that in some rare cases. So it's very material to the bottom line for a driller, and obviously you don't want to shut rigs down anymore than you have to when they're earning that kind incentive revenue.

TWST: What names do you like at this point?

Mr. Muztafago: Halliburton is still our favorite name in the multiservice space. We think, as I said, that North America will turn out to be a lot better in 2012 than people expect. The fracturing market or the pressure-pumping market in North America is still critically undersupplied, and we think as long as you see 5% to 10% growth in rig count in North America this year, the pricing dynamic will actually hold up reasonably well.When you look at the offshore markets, we like CAM and NOV both, and Cameron is exposed to North America as well as to offshore.

The offshore market in particular as we've talked about is in a very heavy upgrading and retooling phase of offshore rigs. What I think people sometimes don't understand is a lot of that stuff is custom built, it's not just off the shelf. So when look at the high-spec providers like Cameron and National Oilwell, they are sort of the go-to companies when somebody wants to upgrade one of these rigs. Also, there is still probably somewhere on the order of 20 to 30 rigs worth of project shortage in the offshore markets yet, so we think that more newbuild rig orders are likely, and we just think the outlook for that space is extremely good and these companies are sort of the Tier-I providers to give you leverage to it.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

View Comments (0)