oil services

Oil Services

Presented by:Valérie GibbsRina Wang

Rami MustafaWarren Jiang

Presentation Outline

Overview of Oil Service Industry• Focus on Oil Drilling & Services

3 Companies• Transocean Inc • Trinidad Drilling – Energy Services Income Trust• Precision Drilling Trust

Oil Industry

Upstream Downstream

Exploration Refining

Commercial Side

-Marketing &Transportation

Extraction

Oil Drilling and Services: Consists of two major sectors: Oilfield Services and Contract Drillers. Each

sector comprises several subsectors and areas of specialized expertise.

Oilfield Services:

• Assist in the drilling, evaluation, and completion of oil and gas well. These companies manufacture, maintain equipments, and provide related products and services.

• In the past, the oilfield services sector was highly fragmented, with companies specializing in a handful of products or services. Today, many service companies participate in several market segments in order to offer a wide range of product and service.

• The four major players are Schlumberger Ltd, Halliburton Co, Baker Hughes Inc, and Weatherford International Ltd.

Oil Drilling and Services IndustryContract Drillers:• Contract Drillers are hired by oil producers. • With the exception of Transocean, the contract drilling firms tend to be

smaller than their counterparts in the oilfield services sectors. • The industry when through an intense shakeout stage in the 90’s as a result

of low oil price: 1987 there was 700 US rig owners this number had dropped to 226 in 2005.

• Contract drillers charge oil producers on a daily work rate, or footage rate.• Drilling contracts are awarded on a competitive bid basis. The companies

compete primarily on the basis of price, quality of service, operational and safety performance, equipment suitability and availability, reputation, and technical expertise.

Oil Drilling and Services IndustryCompetition:• The contract drilling business is highly competitive with numerous industry

participants. • The industry has experienced consolidation in the 90’s when oil prices went

down but there is still room for more.• Recent mergers among oil and natural gas exploration and production

companies have reduced the number of available customers.• Due to the high fixed cost nature of the business, in periods of market

weakness drilling contractors have aggressively lowered day-rates to sustain equipment utilization and earnings have fallen sharply.

• The intense price competition and cyclicality of the drilling industry, is marked by periods of low demand, excess rig availability and low day rates, can have a material adverse affect on the company’s operations. The contract drilling business is highly competitive with numerous industry participants.

Characteristics Oil Drilling & Services IndustryHighly Skilled

The drilling industry is classified as highly skilled and labor intensive. People with skills and expertise to operate drilling equipment are in high

demand and cost a lot of money. Most oil and gas producers find it more cost-effective to hire this expertise from drilling companies.

As the industry moves from bust to boom, qualified employees are laid off are often unwilling to return. The lack of job security hinders the industry’s ability to retain experienced workers and to recruit new people.

• Oil and gas producers set the minimum requirement on the number of inexperienced personnel they will permit to work on a rig, given the high opportunity costs that downtime caused by human error can generate.

Investors Tips: Drilling companies need to keep theiroperating expenses in check in order to allow healthy spending in capital expenditure.

Characteristics Oil Drilling & Services IndustryResearch & Development• With accelerating decline rates in mature reservoirs around the world, oil

and gas producers are facing a difficult job just to maintain existing production. Potential new reservoirs are often located in challenging geological locations, advance in technology are becoming critical to generating future production gains. In addition, companies are striving to come up with technologies that would be less damageable to the environment.

• Newer Development:– Rapid Rig: speed up transport and rigging up – Subsea separation systems: separate hydrocarbons before they are sent to the surface, which saves

time and improves overall recovery from the field.– Optical sensor technology

Characteristics Oil Drilling & Services IndustryHighly Regulated• This industry is highly regulated with regards to environment and health and

safety concerns • The federal, provinces, state, foreign and local laws and regulations

controlling the discharge of hazardous wastes and relating to the protection of the environment affect the operations of all the drilling companies. These regulations address oil spill prevention and control and also significantly expands liability exposure across all segments of the oil and gas industry. Company failure to comply with these statutes and related regulations could result in civil or criminal enforcement action.

Characteristics Oil Drilling & Services Industry

Oil and Gas Price Dependent • Oil and natural gas prices influence drilling activity, each to various degrees.• Gas-directed rig counts tend to lag natural gas prices by several month

while oil-directed rig counts tend not to be influenced by short-term swings in oil prices. Pullbacks in oil drilling take some time because oil contracts tend to be long-term in nature and are not as sensitive to commodity price.

• Nevertheless, oil drilling and services companies are the first to feel the effects of increased or decrease in the industry spending. If oil prices rise, oil services and drilling companies are first on the scene when companies decide to start exploring. We can usually see large expansions in the industry during the peaks of energy cycles.

Oil Prices vs. Oil Services Index

Source: Philadelphia Stock Exchange: OSX Source: International Energy Association

2002-2006 1994-2006

Oil Prices continued…Crude oil price is an important factor when investing in the oil industry.

Global Supply and Demand• The growth in demand from emerging markets such as China and India, the

conflict in the middle east, the many storms and hurricanes had recently help crude oil prices reach an all time high.

• When the news came that demand would turn out to be weaker than expected and that inventories level were higher, it pushed crude oil prices in a downward spiral.

• OPEC, who control and influence the oil supply by member countries, announced oil supply cut for the coming months. Oil price stated raising again.

• Regardless, the expectations for long-term of high crude oil prices are indicative of the difficulties that oil and gas producers are likely to face in meeting future global demand.

• World Oil Demand & Supply

• Source: International Energy Association

Crude Oil Prices & World Events

Characteristics Oil Drilling & Services IndustryCapital Intensive

• Drilling equipments is very expensive to buy and maintain. In order to remain competitive, drilling companies need to maintain and upgrade their rigs.

• Once a rig is ordered, its lengthy construction time keeps it off the market for about 3years.

• Rigs have an economical life of more than 25 years. • There are two main categories of drilling rigs: those that work on land and

those that work offshore.

Investor tips: When analyzing drilling companies, take a close look at their rig fleet: age, quality, depth ability.

Oil Drilling and Services IndustryOnshore & Offshore• The upcycle or boom in land drilling which began in

March-April 2002 was in its late stage until the recent drop in oil price slowed down the market.

• A large number of rigs were added to the market within the past two years but since a sizable number of rigs were retired because they had reach the end of their economic life the total fleet did not increase as much as expected.

• This marginal increase along with the drop in oil price is therefore seen as a potential threat to the previous dayrate gains.

• There are two varieties of land rigs: rotary and cable tool

Oil Drilling and Services IndustryOnshore & Offshore

• Categorized as tight supply and strong demand. • At the end of July, offshore dayrates was still a seller’s market especially in

the golf of Mexico where drillers had started to leave too often confronted to the damaging hurricanes.

• The number of offshore rigs has almost double from 2005 to2006. One reason for that was the advancing age of worldwide mobile drilling rig fleet. On May 2006 the average age for the existing jackup fleet was 24 years; for the semisubmersible fleet 23 years; and for drillship fleet, 18 years

• Skyrocketing dayrates have certainly played a major factor in attracting new investment to the offshore drilling industry.

Investors tips: A high number of the rigs currently under construction or in order are being built by companies on speculation.

As of June 16, 2006, the worldwide fleet utilization rate was 92.6 % versus 85% one year earlier. -In the Europe & Mediterranean Sea alone the utilization was 98.1%.

These high utilization rate work to the advantage of contract drillers in increasing dayrates.

Oil Drilling and Services IndustryOther Key Factors: • Location: For contract drillers, the location of their drilling rigs is of prime

importance. Land rigs tend to remain domiciled within a particular region and/or country. Offshore rigs are often relocated based on market demand.

• Types of Contract: Drillers are generally paid according to one of three methods: a footage contract, a daywork contract, or a turnkey contract. The contract determines a driller’s prospects for future revenue growth.

• Length of Contract: Its good to know when the company’s current contract expire, how many will expire within the next 12 months and how many rigs are locked in for three years or longer. There are advantages and disadvantages to both, long and short-term contract.

Source: Standard & Poor

Oil Drilling and Services IndustrySubstitute Products • BioFuel:

– Biofuel plants are relatively small, inexpensive and can be brought on stream fairly quickly.

– Can be blended with conventional transportation fuels or used directly.– High oil prices, energy supply security concerns, limited spare refinery

capacity and target for GHG emissions reductions have led to a surge in biofuel activity. Growth of 14% for ethanol and 80% for biodiesel were observed in 2005. Production forecasted to double by 2011

– Biodfuels are renewable, can improve vehicle performance, and contribute to energy security.

Sources: International Energy Association

Precision Drilling

Agenda

• Company Info– Management– Company History & WCSB– Business Segments

• Financial Analysis– Financial Reports – Q3 2006 & 2005

• Recommendation

Stock Today

Stock Price (3 year)

Stock Price (1 year)

Company Snapshot

• Incorporated in 1969 in Alberta.

• Reorganized into a Trust on Nov 7, 2005.

• Stock traded on TSE (PD.UN, PD.U) and NYSE (PDS)

• Current cash distribution: $0.31/unit/month

Management• Hank B. Swartout - Chairman of the Board and CEO

– U. of Wyoming – BS. - Hons. Pet.Eng

– Founder of Precision Drilling

• Gene C. Stahl - President and Chief Operating Officer

– Joint Precision Drilling in 1993

– Previous experience in marketing and communication

• Doung J. Strong – CFO– 12 years experience with Precision

• Darren J. Ruhr – VP, Corporate Svc and Corporate Secretary– Joint Precision in 1997– Experience in corporate infrastructure and information technology

Management (cont’d)

Trustees

Business Strategy• Focus on our Target Zero safety culture initiatives to eliminate workplace incidents.

• Continue to develop and enhance our employee recruitment and retention initiatives.

• Continue to upgrade equipment with a focus on keeping customer needs and regulatory requirements in mind.

• Retain a high quality, diverse fleet of rigs and service offerings.

• Maintain a flexible business that is responsive to market conditions and competitive pressures.

• Take advantage of technological advances where markets dictate.

• Focus on growth opportunities that will further enhance and diversify our service offerings.

Company History• Early years

• 1951 - 1984

• Acquisition and Growth• 1987 – 1995• Number of rigs grow from 3 to 83, with 8 slant rigs

• Diversification• 1996 – 2000• New business in Oilfield Supply, Energy Service areas• Reorganized and formed Precision Drilling Limited Partnership (Canadian-based) and

Precision Drilling International• Number of rigs increase to over 200.

• Incorporation and World Expansion• 2001 – 2005• Operated in Canada, Mexico, onshore Europe and Southeast Asia.

• Trust Conversion• Sold Energy Services and international divisions to Weatherford (August)• Nov 7th, 2005, reorganized its remaining Canadian operations into an income trust• Currently operates 229 drilling rigs, 239 service rigs and 26 snubbing units• Focus on the Western Canada Sedimentary Basin (WCSB)

Western Canada Sedimentary Basin (WCSB)

WCSB

• 1.4 million sq.km (including S.W. Manitoba, S. Saskatchewan (10%), Alberta (75%), N.E. BC (15%) and the S.W. corner of the Northwest Territories).

• Contains one of the world's largest reserves of petroleum and natural gas, also has huge reserves of coal.

• 770 drilling rigs, 24,805 wells being drilled at the end of 2005

• 75% new wells completions in 2005 are natural gas

• Est. +100 drilling rigs until June 2007

WCSB - GAS • Mix of deep gas and shallow gas• 75% natural gas wells drilled in 2005

were shallow gas• Quick and easy finds• Relative rapid declines in production

rate

• Deep gas next – deep drilling rigs• currently providing 20 % of NA supply• (est) will satisfy 75% of incremental

U.S. gas demand (National Energy Board))

WCSB - OIL• oil sands - surface mining methods and in situ recovered methods• heavy oil• conventional oil

Business Segments

• Contract Drilling Services • Completion and Production Services

Contract Drilling Services – 71% of 2005 Revenue– Focus on drilling in WCSB– Started drilling in Texas in June 2006– Has the largest drilling rig fleet in Canada– Operates 230 drilling rigs = 30% of the industry

Completion and Production Services

– Canada’s leading provider of well servicing, snubbing services and oilfield rentals.

– Has the largest fleet of well servicing rigs in Canada.– Operates 237 service rigs = 24% of the industry

Financial Analysis

Historical Charts

• Revenue

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500,000

1,000,000

1,500,000

2,000,000

2,500,000

1999 2000 2001 2002 2003 2004

('000

) Revenue

Revenue(DrillingService)

Historical Charts

• Operating Earnings

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

1999 2000 2001 2002 2003 2004

('000

)

OperatingEarnings

OperatingEarnings (DrillingService)

Historical Charts

• Capital Expenditure

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1999 2000 2001 2002 2003 2004

('000

)

CapitalExpenditure

CapitalExpenditure(Drilling Service)

2005 Financial Highlights• May 18: Issued on 2:1 stock split

• Number of stock =61,368,588*2

• Aug 31: Sold its Energy Services and International Contract Drilling divisions to Weatherford International Ltd.

• Proceeded $1.13 billion• 26 million common shares of Weatherford ($2.1 Bil)

• Sept 13: Sold its industrial plant maintenance business, carried on by CEDA, to Borealis Investments Inc.

• Proceeded $274 million

• Nov 7: Completed the conversion into Income Trust• 122,512,799 units, $1.34 billion => 10.9/unit• Special cash pmt $844 mil. ($704 mil – repay LTD)• Transferred 25.7 million shares of Weatherford ($2 billion) to

shareholders

2006 and afterward• Capital Expenditure program ($510 million)

• Expansion capital ($390 million)– $16 million – Acquisition of Terra Water Group Ltd.– $125 million – first 9 mo’s of 2006

» +35 new drilling rigs completed 2006 – 2008 15 in 2006 (9 in service already) 14 in 2007 and 9 in 2008.

– $79 million – Oct - Dec 2006– $170 million – 18 mo’s following Dec 2006

• Maintenance capital ($120 million) for 2006 & 2007.

• US Market• Started drilling in Texas in June 2006.• +5 new rigs under construction for the US mkt with long-term

customer commitment• Expect >11 drilling rigs operating in US by the end of Q2 2008.

• Acquisition of Terra Water Group Ltd (Aug 17, 2006)• Expand of the wastewater treatment unit fleet by 38% by Q1 2007.

Financial Reports

• 2006 Q3 Reports– Balance Sheet – Earnings and Retained Earnings– Cash Flow

• 2005 Annual Report– Balance Sheet – Earnings and Retained Earnings– Cash Flow

Recommendation

Transocean Inc.

Symbol: RIG-N

Transocean Inc.

  Last:  US$ 75.670

Net Change:   US$ -0.900 % Change:   -1.18%

Open  76.550 Bid

High  76.560 Ask

Low  75.050 EPS

Volume  4,224,700 P/E

52-Week High

 90.160 Indicated

Annual Div.

52-Week Low

 56.500 Yield

1-year/daily 5-year/weekly

Stock Performance

Stock Performance vs. S&P 500 Index

• Company profile

• Transocean Inc. provides contract offshore drilling services for international, national and independent petroleum companies around the world. They have the largest fleet of mobile offshore drilling units, which includes drillships, semisubmersibles and jackups.

• Main area of focus is constructing all kinds of wells in water depths of the world's major offshore drilling markets, specializing in deepwater and harsh-environment drilling.

• Transocean Inc. is the largest offshore drilling company by market equity capitalization ($25 billion as of march 2, 2006)

.

Company Profile

• Added to the S&P 500 in 1999.• Trades on the New York stock exchange under the symbol “RIG”.• It has 318 million shares of common stock outstanding.• Employs approximately 11,600 people.• Incorporated in the Cayman Islands• Main office in Houston, Texas.• Offshore Drilling Markets Served: U.S. Gulf of Mexico, eastern Canada,

Brazil, Trinidad, U.K. North Sea, Norwegian North Sea, Caspian Sea, Middle East, India, West Africa, South Africa, Southeast Asia, and Australia

Technological Innovations and Industry Firsts• First offshore jackup drilling rig • First self-propelled jackup • First turret-moored drillship • First dynamically positioned drillship for exploration • First dynamically positioned semisubmersible • First fourth-generation semisubmersible • First rig to drill year-round in the North Sea • First semisubmersible for sub-Arctic, year-round operations in the Barents Sea • First semisubmersible for year-round drilling West of the Shetland Islands in more

than 4,000 feet of water • First deepwater semisubmersibles with patented Tri-Act derrick • First ultra-deepwater drillship with patented dual-activity drilling system

• Management TeamJ. Michael Tilbert,Chairman Transocean Inc•Holds a B.S in chemical Engineering and an MBA from Loyola university•With the company since 1994•In the industry since 1970, held different positions at shell, lone star Gas company and Texas Oil and Gas.

Robert L. Long,CEO and member of the board of directors.•Joined the company in 1976, previously held different executive positions including VP, senior VP and CFO.•A graduate of the US Naval Academy and holds an MBA from Harvard•Base salary = $722k, Bonus = $750k, Restricted stock awards = $3,290,876

Jean P. Cahuzac,President Transocean Ins.•Previously held the positions of Executive V.P and C.O.O•27 years experience within the Oil & Gas industry•degree in France from Ecole des Mines Saint Etienne and• French Petroleum Institute•Base salary = $422k, Bonus = $362k, Restricted stock award = $1,222,353

Steven L. Newman, E.V.P and C.O.O Transocean Inc.•Joined the company in 1994•Holds a B.S. in Petroleum Engineering from the Colorado school of mines and A Harvard MBA.•Base salary = $250k, Bonus = $146k, Restricted stock award = $564k

Fleet Information

•As of march 2, 2006 the company’s fleet of 89 Rigs, excluding assets held for sale, included:

•32 High specification floaters (Built in the construction cycle of 1996 to 2001, water depth capability of 7500 feet or greater)•23 other floaters (Rigs that have been built in the mid 1980’s, capacity of at least 4500 feet)•25-Rig Jackup fleet (suited for water depth of 300 feet or less)•9 other Rigs

Rig Location Map

•US Gulf of Mexico (12 units)•Trinidad (1)•Canada (1)•Brazil (8)•North Europe (17)•Mediterranean and Middle East (5)•Caspian Sea (1)•West Africa (16)•India (10)•Asia & Australia (18)

Rig Type/Name Floater type

Yr

Entered Service

Water

Depth

Drilling Depth

Location Client Contract

Start

Contract

End

Dayrate

current

Dayrate

Previous

Cajun Express semi * 2001 8,500 25,000 USGOM Chevron

Jul-05 Aug-07 216,400 140,000

USGOM Chevron

Aug-07 Feb-10 460,000 216,400

Jan-08 15 days Shipyard or

Project

Deepwater Nautilus(4)

semi 2000 8,000 30,000 USGOM Shell Dec-05 Dec-06 220,000 195,100

USGOM Shell Dec-06 Dec-08 425,000 220,000

Dec-08 20 days Shipyard or

Project

Sedco Energy semi * 2001 7,500 25,000 Nigeria Chevron

Jan-06 Jan-08 202,000 175,000

Jan-08 30 days Shipyard or

Project

Sedco Express(7) semi * 2001 7,500 25,000 Angola BP Jun-05 Jun-08 169,500 125,000

Jun-08 30 days Shipyard or

Project

Fleet Information/Revenue

Fleet Information

Fleet Information

• Discoverer Enterprise• First ultra- deepwater drillship with

dual activity drilling technology, which aims to reduce the cost of an ultra deepwater development project by up to 40 percent.

• It can drill, test and complete wells in water depths of up to 10,000 feet

• The rig can drill a well 35,000 feet below sea level, or more than 6.5 miles from the drill floor.

• Three year contract with BP.• Industry leading Dayrate of $520,000

Fleet Information

• Sedco Express• Transocean has delivered three

of these "fifth-generation" units, the Sedco Express, Cajun Express and Sedco Energy

• These rigs are estimated to be capable of reducing total well construction time by at least 25% and total well construction cost up to 30%

Biggest concerns

• Big clients, Transocean’s biggest clients in 2005:

1. Chevron (12.1%)

2. BP (11.7%)• Intense price competition• Business depends on the level of activity in the Oil and Gas industry, which

depends on many factors.• Mergers among oil & gas exploration and production companies reduces the

number of customers• Some contracts permit the customer to terminate the contract at the customer’s

option without paying a termination fee.• So many rigs are being built by industry participants (21 high specification, 51

jackups) with delivery dates range from 2006 to 2010, this may have a negative impact on utilization and day rates.

• Act of GOD (not covered under current insurance policies).

Future Outlook

• Record oil prices will continue to drive the industry.

• Prospects for the 32 high specification fleet remains robust. New five year contract to build an enhanced drillship, with an estimated capital expenditure of $650 million.

• The other floaters fleet, comprised of 23 semisubmersible rigs, is largely commited to contracts that extend to 2007, 3 rigs remain idle as of march 2006

• $300 million contract with shell to upgrade a Sedco 700-series semisubmersible, upgrade set to finish in 2008

• $300 million contract with Chevron to upgrade a Sedco 700-series semisubmersible, upgrade set to finish in early 2009.

• Outlook for the activity in the Jackup market remains strong (100% utilization rate in 2006)

Future outlook

Statement of Operations, 2nd Q, 2006

Consolidated Balance Sheet, 2nd Q, 2006

Statement of Cash Flows, 2nd Q 2006

Annual Consolidated Statement of Operations In millions (Except for share data)

Annual Consolidated Balance Sheet

Annual Consolidated Statement of Cashflows

Annual Consolidated Statement of Cashflows cont’d

RECOMMENDATION

BUY

Agenda

• Company Background and Management Team

• Firm capital structure • Recommendation• Fundamental Analysis (Financial Report

Evaluation)• Technical Analysis

Company Background

• Stock Exchanges: TSE (TDG/UN.TO)• Market Cap: 941 Million (As of Nov 13, 2006)• Share Price: $11.93 CAD (As of Nov 13, 2006)• P/E Ratio: 9.3• Yield: 12.31%• Expected Annual Distribution: $1.38

Three Years and One Year Price Chart

• Three Year Chart • One Year Chart

Management Team• Michael E. Heier,

Chief Executive Officer and Chairman served as Chief Executive Officer and Chairman of Trinidad Energy from

1987

• Lyle C. Whitmarsh,President

more than 15 years of oil and gas exploration experience Only has a high school degree ( Street Smart Person) employed with Trinidad Drilling since July 2000

• Brent J. Conway,Chief Financial Officer

Graduated from University of Calgary with a Bachelor of Commerce in accounting

CGA Designation Holder, used to work for Deloitte Joined Trinidad in November of 2001

Products

• Drilling Rigs:• A drilling rig is a structure housing

equipment used to drill for water, oil, natural gas from underground reservoirs. The term can refer to a land-based rig, a marine-based structure commonly called an 'offshore rig', or a structure that drills oil wells called an 'oil rig'.

• However, the rig is not involved with the extraction of the oil; its primary function is to make a hole in the ground so the oil can be produced.

• For more information: click here

Firm Cost Structure

Recommendation

Analysis of Financial Statement

• Analysis of Quarterly Report

• Analysis of Annual Report

Quarterly Highlight

Annual Report

Fundamental Analysis Conclusion

• Low P/E: 8.3

• High yield: 11.65%

• Positive Cash Flow

• The Business is Under Expansion

• Still Has 5 years Transition Period to be regulated under the new tax policy.

• So, Why not Buy????

Technical Analysis (Weekly Chart)

Technical Analysis (Daily Chart)

Conclusion

• Based on fundamental perspective, Trinidad is a great company to buy, but technical analysis tells us now is not a good time for long. You can go to buy some tech stocks in U.S first, then come back to look at this company few months later.

• Good Luck on your investment!!!