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Handsome Profits For Hired Rigs


Talk about pricing power. Danny McNease, chairman and CEO of Houston's Rowan Cos. (RDC), is charging energy companies 30% to 50% more than a year ago to punch holes in ocean floors around the world searching for new oil and gas supplies. Of course, big energy companies are having no problem footing the bill. "It's amazing how much those E&P [exploration and production] guys are making," McNease told analysts in an Aug. 2 Webcast. Yet it's equally amazing -- and far less noticed -- how much Rowan and other contract drillers are making these days, thanks to $60-a-barrel oil and natural gas at $7 per million BTU.

The good times are rolling for the $2.5 billion contract-drilling industry. With Rowan's latest quarterly results, McNease gave his shareholders, already flush from a 60% gain in their stock over the past 12 months, a gusher of happy news: a $43 million second-quarter net, vs. last year's loss; record revenues of $245 million, a 50% jump; and a 25 cents special dividend. For dessert, McNease served up news of a lucrative new three-year contract with Saudi Aramco Oil Co. for five rigs now working in the Gulf of Mexico at lower rates.

A few miles away, in Sugar Land, Tex., driller Noble Corp. (NE) had much the same story for investors, posting a 113% second-quarter profit gain, to $73 million, on revenues up 35%, to $344 million. It, too, ticked off a number of contract extensions in Brazil, Nigeria, and elsewhere, many at sharply higher rates.

Can they keep it up? McNease not only sees the industry's strong momentum continuing through the next 18 months but he's also talking about a scenario of strong demand for drilling and a limited supply of rigs that could extend to the end of the decade. "This cycle is different," he says. Scary words from any CEO in a violently cyclical industry. But McNease, a 31-year veteran of the business who has spent much of his career riding ugly downturns, argues that big drillers like Rowan won't make the usual mistake of overexpansion this cycle.

In part, that's because consolidation has made the surviving contractors smarter and more cautious. "You have a smaller number of big players, and they have the experience of other up cycles, so they're more disciplined," says Brian Janiak, a Standard & Poor's (MHP) credit analyst. Just as important, drillers may be prevented from expanding too fast by chronic shortages of the super-strong structural steel used to build offshore rigs and by shrinking availability of shipyards needed to construct some larger rigs. The major yards are booked building tankers and liquefied natural gas ships.

HUGE RISKS

A persistent shortage of workers qualified for demanding and dangerous offshore work may also limit expansion. Noble, like many drillers, is holding regular recruiting sessions for engineers, drillers, and other workers in Gulfport, Miss.; Hattiesburg, Miss.; Mobile, Ala.; and other Gulf locations. But in many cases qualified workers have to be hired away, at higher wages, from rival contractors. Indeed, Noble CEO James C. Day is less concerned about more speculative drillers adding too much capacity than he is about speculators hurting the industry by creating health, safety, or environmental risk as they stretch to man their rigs in an extremely tight labor market.

Despite these restraints, the offshore rig count has risen by 20% in the past two years. Yet there is always huge risk when a business depends on the cost of a volatile commodity. When the price of oil can soar fourfold in just 6 years, experts warn, prices in the $40s and even the $30s may be in the cards within a few years. S&P assumes such fluctuations in analyzing the credit of drillers. A price crash could occur, for example, if current drilling starts paying off just as demand cools because of slowing economies and greater fuel efficiencies.

For now, drillers are more focused on how to deploy all the money that's rolling in. That will be Topic A at Rowan's November budget meetings. McNease says possibilities include paying down more debt, another special dividend, or buying back stock. Beats the heck out of cutting back on work and stacking idle rigs in the down cycles that always seem to follow boom times like these.

By Mark Morrison in Austin, Tex., with Peter Coy in New York


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