BP’s new head, Tony Hayward, had the unpleasant task of reporting a 13% fall in second-quarter profits in his City debut this week, as production fell for the eighth quarter running. But BP’s results will reflect the woes of many other oil majors, said Guy Chazan in The Wall Street Journal. Production volumes have been slipping across the industry and costs are escalating as the majors struggle to keep up with the insatiable appetite for energy.
Why are oil firms’ costs rising?
“The problem is getting the oil out of the ground,” said Chazan. After years of cheap access to oil, the industry is facing a serious shortfall in the equipment and manpower it needs to produce it. Orders for offshore rigs have increased sixfold in just five years, doubling the price of renting a rig to $500,000 a day. That’s good news for investors in oil drillers, and the sector is likely to remain attractive after deep-sea driller Transocean forked out $18bn in an innovative all-share deal for sector peer GlobalSanteFe this week, resulting in a combined group with a 20% share of the market. “The new Transocean has a $33bn backlog of contracts extending as far as 2015,” said Jad Mouawad in The New York Times. The combined group is restructuring its finances, borrowing $15bn against this expanded order book, which will be paid out to shareholders of both companies as a special dividend.
Which companies could be next?
“In terms of impact on the industry, this may usher in more mergers and acquisition activity… in order to prevent a single company from dominating,” said Bear Sterns analysts on Reuters. With oil prices remaining high – Jeffrey Currie of Goldman Sachs believes the $95 a barrel mark may be hit before the end of this year – oil services companies should remain in demand. Potential targets include Noble, Diamond Offshore, Pride International and Rowan, said Reuters.