D. Chapter Resources
III. MUDS, DRILLING FLUIDS AND LUBRICANTS
4. Typical Firms
The Atlantic Communications’ Gulf Coast Oil Directory lists a total of 61 Drilling Mud and Services companies in its directory. Of these 61, 39 report their number of employees. As shown in Figure 16, the majority of companies (23 companies) in the GOM area are smaller with a range of 1 to 25 employees. Only two companies, Cabot Specialty Fluids and Halliburton, are reported as having over 500 employees.
0 5 10 15 20 25
1 to 25 26 to 100 101 to 250 250 to 500 500 to 1000 1000+
number of companies
number of employees
Figure 16. Number of employees at GOM-based drilling mud and services companies.
The drilling fluids, or muds, industry has always been very competitive, and the market is driven by price and performance. As shown in the figure above, the majority of competitors in the GOM are smaller, private companies. There are however, large integrated major companies such as Cabot, Halliburton, and Newpark Resources. Generally, competition is based on several factors, including well site engineering services, product quality and availability, technical support, service response, and price.
Perhaps the largest company in this segment is Halliburton, a $13.5 billion conglomerate of which fluid services is just one of six business units. Based in Houston, the Fluid Systems division had revenues exceeding $3.5 billion in 2006 with $1.8 billion attributed to the North America market (SEC, 2006k).
The Specialty Fluids Business of Cabot Corporation produces and markets cesium formate as a drilling and completion fluid for high pressure and high temperature oil and gas well operations.
Cesium formate is rented to customers for use in drilling operations on a short-term basis. After completion of a job, the customer returns the fluid to Cabot and it is reprocessed for use in subsequent well operations. Any fluid that is lost during use is paid for by the customer. The rates to be charged for the rental and any loss are negotiated and agreed to prior to the beginning
Source: Atlantic Communications, 2006.
of the job. Usually, approximately 15 percent of the cesium formate used in an operation is lost (SEC, 2006l).
Newpark Resources is a diversified oil and gas industry supplier with three operating segments, including fluid systems. Its customers are primarily major and independent oil and gas exploration and production (E&P) companies. During the year ended December 31, 2006, approximately 43 percent of Newpark’s revenues were derived from its 20 largest customers.
No one customer accounted for more than 10 percent of its consolidated revenues. Typically, Newpark performs services either under short-term standard contracts or under longer term service agreements. As most agreements with Newpark’s customers are cancelable upon short notice, its backlog is not significant (SEC, 2006m).
Like other competitors, all of these companies have large research and development practices to continuously improve existing drilling fluids, and to produce new products that improve drilling efficiency and meet environmental regulations.
C. Industry Trends and Outlook 1. Trends
As noted by Newpark Resources in its recent annual SEC filing, several factors drive demand for services, including: (i) supply, demand and pricing of oil and gas commodities which drive E&P development activity; (ii) a trend toward deeper and otherwise more complex drilling that drives drilling fluid consumption and increasing technical requirements; (iii) the continued trend of E&P development into more environmentally sensitive areas; and (iv) the use of increasingly complex drilling techniques that tend to generate more waste. Demand for most services is related to the level, type, depth and complexity of oil and gas drilling (SEC, 2006m). The most widely accepted measure of activity is the Baker Hughes Rotary Rig Count, which as shown in Figure 4 has been rising since early 2002 in response to strengthening oil and gas prices. Figure 5, however, shows that drilling in the GOM has decreased in recent years.
In 2006, Newpark reported revenues from its fluid systems division of $481 million ($302 million from U.S. sales), up from $384 million in 2005. Newpark reported that the revenue growth was due to new market penetration and servicing of more complicated wells that generate higher revenues and improved margins (SEC, 2006m).
Halliburton’s North America revenue for 2006 grew $1.6 billion compared to 2005. This growth was primarily led by production enhancement services, where it helps customers optimize the production rates from the wells by providing stimulation services. Despite having downsized its GOM operations due to its downturn in 2002-2003, Halliburton continues to have a significant presence in the region and is positioned to meet increasing customer demand. As a result, revenue from the Gulf of Mexico in 2006 was up 32 percent year-over-year, which contributed to a 152 percent increase in operating income in the Gulf of Mexico (SEC, 2006k).
Halliburton’s Fluid Systems segment operating income increase compared to 2005 resulted from 54 percent growth from Baroid Fluid Services and 43 percent growth in operating income from cementing services. Baroid Fluid Services operating income benefited primarily from increased activity and improved pricing in the United States and increased activity in Asia. Cementing
services results increased predominantly in the United States due to increased activity and new contracts along with increased activity in Europe (SEC, 2006k).
2. Hurricane Impacts
As in every other offshore drilling and production segment, the 2005 hurricanes affected the drilling muds industry due to well shut-ins and damaged infrastructure. In the case of Halliburton, the hurricane related delays cost about $33 million of lost operating income (Kelly, 2005). Much of the increased activity in 2006 was the result of repair work to existing wells, as well as new drilling operations in the GOM. Other drilling fluid companies were also impacted, but most are operating at or near pre-storm levels.
3. Outlook
As in other exploration and production-associated segments, the drilling fluids business is subject to the cyclical nature of the oil and gas industry as a whole. With current high oil and gas prices and the move to deepwater wells, the demand for drilling fluid business is great and, ever-tightening restrictions associated with OBM, WBM, and SBM intensify the search for better, more environmentally friendly muds.
In its 2008 SEC filing, Halliburton reviewed the downturn in drilling and production activities in North America. The filing discusses falling rig counts and cuts in capital expenditures (especially related to conventional and shallower drilling activity) (SEC, 2008a). Falling natural gas prices, excess equipment supply and customer requests for discounts on work are all signs of market weakness. Halliburton also expects “severe margin contraction to occur worldwide starting in the first quarter of 2009.”
Similarly, in a 2009 quarterly filing, Newpark Resources explained that the current economic environment, the instability of credit markets and declines in oil and gas prices have significantly impacted drilling activity. This decline has negatively impacted Newpark’s operating results.
Newpark expects this trend to continue for the remainder of 2009 and 2010. In response to these declines in activity and increased price competition, Newpark has attempted to cut costs by reducing their workforce, capital expenditures, discretionary spending and salaries (including the temporary elimination of 401(k) matching for U.S. employees) (SEC, 2009c).
D. Chapter Resources
Atlantic Communication’s Gulf Coast Oil Directory
Includes a wide range of data from company name, address, web and email addresses to contact names with titles, direct phone numbers, and email addresses all organized alphabetically by industry categories. Also included is "Company Detail" information such as company size, revenue, areas operated in last 12 months, operations onshore or offshore, and stock information for publicly traded companies.
http://www.oilonline.com/store/directory.asp
U.S. Securities and Exchange Commission
Quarterly and annual reports of operations for publicly traded companies are filed with the Securities and Exchange Commission.
http://www.sec.gov/edgar/searchedgar/companysearch.html