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Budgets Bode Well for Upstream

'Pockets of Improved Activity'

For quite some time the E&P companies have taken advantage of lingering high commodity prices by paying down debt and, in many instances, increasing dividends to shareholders. They have shunned exploration in large part, choosing instead to grow reserves through property acquisitions, corporate mergers and the like.

When oil prices begin flirting with the $50 per barrel mark, however, buying one's way into increased reserves becomes less palatable. Not surprisingly, a number of companies have announced increased cap-ex budgets, which is an encouraging sign for the seismic contractors, among others.

Still, the seismic business continues to struggle, albeit a tad less than last year. Guarded optimism is the pervasive theme among many sector participants.

"We've indicated to our shareholders we think this year will be marginally better than last year," said Hank Hamilton, CEO at TGS-NOPEC. "We've noticed a little bit of pickup in demand by the E&P companies — various companies in various markets. We see pockets of improved activity; it's not widespread everywhere.

"The new focus seems to be back on improving long-term reserves, which means either buying or exploring for them," Hamilton said. "We're seeing a combination of these."

There has been considerable hand-wringing on the part of some industry players over the pain inflicted on their balance sheets by the once wildly-popular multi-client business model.

It's a case of different strokes for different folks.

For instance, some companies report they are continuing to play multi-client successfully.

"We still believe multi-client is a good business model," said Steve Ludlow, president at Veritas-DGC. "We think it's still worth investing in."

Hamilton concurs.

"Just about all we do is multi-client," Hamilton said. "But we can do projects when we're ready and not before because we don't own a fleet of vessels.

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For quite some time the E&P companies have taken advantage of lingering high commodity prices by paying down debt and, in many instances, increasing dividends to shareholders. They have shunned exploration in large part, choosing instead to grow reserves through property acquisitions, corporate mergers and the like.

When oil prices begin flirting with the $50 per barrel mark, however, buying one's way into increased reserves becomes less palatable. Not surprisingly, a number of companies have announced increased cap-ex budgets, which is an encouraging sign for the seismic contractors, among others.

Still, the seismic business continues to struggle, albeit a tad less than last year. Guarded optimism is the pervasive theme among many sector participants.

"We've indicated to our shareholders we think this year will be marginally better than last year," said Hank Hamilton, CEO at TGS-NOPEC. "We've noticed a little bit of pickup in demand by the E&P companies — various companies in various markets. We see pockets of improved activity; it's not widespread everywhere.

"The new focus seems to be back on improving long-term reserves, which means either buying or exploring for them," Hamilton said. "We're seeing a combination of these."

There has been considerable hand-wringing on the part of some industry players over the pain inflicted on their balance sheets by the once wildly-popular multi-client business model.

It's a case of different strokes for different folks.

For instance, some companies report they are continuing to play multi-client successfully.

"We still believe multi-client is a good business model," said Steve Ludlow, president at Veritas-DGC. "We think it's still worth investing in."

Hamilton concurs.

"Just about all we do is multi-client," Hamilton said. "But we can do projects when we're ready and not before because we don't own a fleet of vessels.

"We see some windows of opportunity because some other large players made some bad investments in multi-client projects and had to take large writedowns," Hamilton said. "They had to cut back out of necessity, and we've picked up a little of that slack."

A Host of Challenges

The industry overall is confronted with a host of challenges.

For starters, the Chinese continue to pose an increasing threat to market share.

"I see BGP (the wholly-owned subsidiary of China National Petroleum Corp.) as more and more of a threat around the world," Ludlow said. "I think it will hurt some of our competitors more than us because we're not a big Third World-type player, and I don't see them big in the U.S. or Canada — as we speak. But who the hell knows?

"I think it likely they will be even more a party to worry about," Ludlow continued, "because they don't even seem to take in the cost of capital in their bidding calculations."

Chip Gill, president of IAGC, outlined a number of other issues the industry must grapple with, including:

  • Access — There are increasing efforts globally to designate areas as sanctuaries and eliminate access. The United States is not looking at opening a moratorium that keeps most of the U.S. waters from being explored.
  • Marine mammal protection — This issue continues to evolve in a way that increasingly adds cost to operations. Canada, Australia and the United States all are re-writing guidelines and regulations. The jury is out on results, but anticipation is there will be no backward move, i.e., results will be status quo or worse.
  • Recent terrorist targeting of oil service personnel — The nature of the seismic data acquisition business makes it difficult to take preventive measures; crews spread over remote areas are vulnerable.
  • Capacity — Capacity has come out in terms of number of boats, but reconfiguration to streamers brings capacity back in. As boats are released and returned to owners, they pop right back up in the market under new owners or operators.

The capacity issue touches a nerve with a lot of folks.

"Globally, there is still overcapacity of 3-D marine boats," Ludlow said, "but we see that sometimes mitigated by extra work from some of the national oil companies, such as Pemex, which soaks up some of the capacity.

"But when the job is finished and the capacity comes back in, you see the same old thing where low bid wins," he noted.

The barriers to entry into the business remain low. This is particularly true on the land side, where the cost for 10 crews tallies about $100 million, which equals roughly the cost of one seismic ship, according to Ludlow.

Domestic land crews are busy, but it's a balancing act.

"I think there's plenty of opportunity for more contraction in the industry," said Jim White, president, Trace Energy Services, which focuses on land seismic data acquisition.

"When they shut down U.S. and Canada land at WesternGeco," White said, "I think the extra we hoped to occur was the system would right itself and the business would get healthier.

"The problem though, was capacity went out, and others put it right back in, and we're seeing a lot of expansion still," he said. "But I can't fault the competition because if they can make money, they're doing something we're all striving to do."

White credits Trace's current profitable position in part to latching onto new state of the art acquisition systems and he also emphasized the need for patience and selectivity.

"There are jobs that are company killers," White said. "If you put 50 percent of your equipment on one job that you won because of low margins, and then have problems, it could break the back of a company our size."

Wanted: Higher Morale

While many companies are scrambling just to maintain a respectable balance sheet, some are on the sidelines with some big plans that are sending shivers down the collective spines of a number of contractors.

A startup, Global Geophysical — spearheaded by Richard Degner, a veteran of both Western and PGS — is gearing up to launch perhaps a dozen onshore and transition zone crews worldwide.

"If they do that, there goes our pricing," White lamented.

Maybe, maybe not.

The newbie is in the final throes of securing private equity financing, and the crew formation and deployment will come about over time.

"We expect to build a $200 million a year organization," Degner said, "which we chose because that will be 10 percent of the market.

"It will give economies of scale, buying power, revenue base to support the best support staff, but it won't be so great as to be bureaucratic and cumbersome, or so we become overly reliant on particular markets or clients," he said.

"We'll gear up as fast as the market lets us, until we reach the size we want," Degner said. "We think four years to do it is achievable."

It's a kind of culture thing.

"We're still in a beleaguered state to an extent in the morale at the companies," Degner said. "People are not as committed, spirited or passionate like those who characterized the industry 40, 50 or more years ago."

Degner opines that productivity is directly related to the morale, spirit and effectiveness of the people who make up the geophysical crews and the service entities. He noted companies today are not nurturing the culture and creating the spirit that gives a competitive advantage that characterized certain successful companies in the past.

"We've had a large amount of people approach us who share these values and vision and desire to work for an organization with that culture," he said, "which is what we're putting together."

The appetite for investment in seismic over the last 12 to 18 months has increased tremendously, according to Degner. He estimates the onshore market available for western data acquisition companies today to be $1.7 billion, which will grow to a $2 billion per year level in 2008-09.

The fundamentals appear to be in place for the entire industry to steadily improve over the next year or so, Hamilton said.

"Companies continue to add powerful processing centers and provide faster turnaround for clients," Gill noted, "and we're seeing continuing investment in derivative products, such as AVO processing, interpretation and depth migration.

"We're also seeing more interest on the part of clients in 4-D," he continued, "with tenders out for repeatable surveys. That technology is starting to gain momentum.

"There's no panacea out there, but it's a little better. We've moved away from the brink."

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