You see, for major oil companies, it's the name of the game.
If you recall, not one of the petro-monsters was able to replace 100% of their oil produced for the year. In fact, it's a problem they've had for quite sometime now but, as of yet, haven't been able to wrestle it to the ground.
It's a dirty little secret they've kept for quite a while.
But for the major oil and gas firms, the big boys like Exxon Mobil, their problems don't stop there.
A Bad Moon Rising
On top of failing to replace their reserves, the oil and gas producers are facing sharp production declines from their existing wells. In order to keep afloat they need to increase production to meet global demand.
Now in order to increase production, these petroleum firms must construct new wells in reservoirs known to contain oil and natural gas.
The problem is that these companies need drilling rigs to bore holes to find and develop the oil. But, generally speaking, oil and gas firms don't own them. So, they have to contract companies that do. And if you happen to be an oil and gas drilling company right now, you're in a pretty good position.
You see, nowadays there are so many producers interested in drilling right now, that there's a scarcity of drilling equipment.
This has led to massive increases in the rates the offshore drillers can charge each day.
According to ODS-Petrodata, an industry leader that provides market intelligence to the upstream offshore oil and gas business, the average day rate for a jack-up rig in West Africa in November of 2005 was $92,500 per day.
By March, 2006 the day rate for this class of rig had jumped 46% to more than $135,000 per day.
Similarly, day rates for heavy-duty jack-up rigs in the North Sea rose 42% from about $171,000 per day to about $243,000 per day from in the same period.
And from here on out more rate hikes are expected.
One beneficiary to the price hikes may be ENSCO International (NYSE:ESV). ENSCO is a Dallas-based driller which operates a fleet of about 46 drilling rigs. Market analysts expect that ENSCO fleet to be almost 100% utilized in 2006.
Another beneficiary may be GlobalSantaFe (NYSE:GSF), a Houston-based offshore driller that operates a fleet of 61 marine drilling rigs. The company recently signed a six-month contract for a jackup rig with a rated water depth of 270 feet for $120,000 per day in January, then a record for that class of rig in the Gulf of Mexico.
But don't expect these price increases to curb demand.
The fact is, these rates don't even amount to a rounding error in the daily revenues the major oil companies post.
But they do point out two pieces of useful intelligence for investors.
First, big oil is under assault from all sides. Declining production, failure to replace reserves, and a dearth of new significant discoveries.
Second, big oil is big business...not just for the producers, but for all manner of companies from service companies to tiny tool manufacturers.
According to Baker Hughes, which tracks the worldwide rig count for the oil-services industry, the number of rigs at work in March 2006 was 3,069. This is an increase of 452 from a year ago.
A drilling operation may not be as sexy as an oil company with a reserve so large that it would make T. Boone Pickens choke. But that doesn't mean it isn't profitable.
In the meantime, big oil will do whatever it takes, at whatever it costs, to get what's left of their reserves out of the ground.
- Luke Burgess
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