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Gulf Drilling Halt Starts To Sting Companies

17.06.2010 -

The moratorium on deepwater drilling in the Gulf of Mexico has begun to bite oilfield service companies, with market analysts now forecasting lower than expected spending on new projects in the region and pressure on drilling stocks.

The U.S. Minerals Management Service implemented the six-month halt to drilling in water deeper than 500 feet in May following the blowout and explosion at BP's deepwater well, bringing new projects to a standstill in one of the world's busiest oil and gas regions.

A survey of companies released by Barclays Capital on Wednesday showed oil and gas producers would likely spend $1.6 billion less on exploration and production in U.S. than they had expected at end-2009 because of the moratorium.

"Overall, we have estimated a spending reduction as a result of the deepwater drilling moratorium put in place following the Macondo oil spill of 2%," the Barclays analysts said in a note to investors.

Spending in the U.S. is now expected to rise 18% to $85 billion from last year, rebounding from the weak 2009 when soft oil prices curtailed the hunt for new oil and gas supplies.

Exploration and production budgets depend heavily on oil and gas prices, and are a key driver of revenues for oilfield services companies such as Schlumberger, Halliburton and Baker Hughes.

The moratorium is widely viewed as a threat to revenues at companies such as Diamond Offshore, Ensco and Transocean, the owner of the rig that exploded and sunk after the BP well blowout.

JP Morgan Securities said it had cut price targets for the offshore drillers, including Transocean, Diamond Offshore Drilling, Noble Corp and Pride International, citing the shrinking revenues from the Gulf.

"Our opinions on the oil services sector have solidified further in favor of large-cap services and away from offshore drillers," analysts led by J. David Anderson wrote in a note.  "We now expect the impact to offshore drillers will be much more severe."

The brokerage downgraded shares of Ensco to "neutral" from "overweight" citing concerns over contract risk with its uncontracted newbuild rigs and lowered its price target to $45 from $52.

Also on Wednesday, Pride International said its profits could suffer because of the delays in putting two drillships hired by BP to work. The moratorium has put in doubt Pride's ability to secure new contracts for the rigs, the company said in a filing with the U.S. Securities and Exchange Commission.