James C. West, lead oil services and drilling analyst at Barclays Capital, is seeing incredible growth ahead for oil production around the world. In this interview with The Energy Report, West explains how likely constitutional change in Mexico will spur momentous industry growth, along with new deepwater targets opening up in offshore China. Meanwhile, decent commodity prices and economic improvement in Eastern Europe are creating powerful oil price tailwinds. But the best news is closer to home, in North America. Find out which companies are positioned to thrive in the year ahead.
The Energy Report: James, welcome. What were the most significant takeaways for you from the Barclays Capital Conference in September?
James West: There were five major takeaways. Four of those were very positive. One was negative. The first was that the outlook for North America in 2014 has improved. We're getting some tailwinds from commodity prices, of course, but the oil companies that previously were gas companies have now arranged their drilling programs for 2014–2016 and are relaying that visibility to oil service companies that have been operating in North America in a fairly volatile environment for the last two years. Companies are much more optimistic on the outlook for 2014 in North America.
Number two, the Eastern Hemisphere is booming at this point. Both Southeast Asia and the Middle East are growing very rapidly, as is Russia, and then there are good trends in East and West Africa. The only market not doing well, for obvious reasons, is North Africa, but I think we'll see far-reaching effects of that strength in the Eastern Hemisphere as companies report results in the near term.
The third takeaway was the bullishness around Mexico, mostly for 2014 and beyond, because Mexico is a slight headwind for the industry right now, but should turn into a tailwind as we go into next year. There are two parts to Mexico: Number one, PEMEX (Petróleos Mexicanos) has ten tenders outstanding, which are being referred to as mega tenders by the industry, for integrated project management (IPM) work that would start early next year. The tenders are out, the bids are due soon. Those should start up pretty quickly in the first quarter of 2014 (Q1/14) and that should be a very nice boost to overall activity level. It represents about 50-plus rigs going to work.
Second, most company managements and all the consultants and people that we speak to believe that there will be constitutional reform in Mexico that will break the monopoly on the oil and gas business and allow private capital to flow in. That could take a little bit of time, and there's a congressional vote expected at some point in October and, of course, a change to the Constitution has to be ratified by the leaders of the various states in Mexico. That should be done by year-end or early next year. Following that, we'll see private capital coming to the market, probably to go after the five shale plays in Mexico and deepwater activity, but it may take several quarters.
The fourth takeaway was a lot of bullishness on China, both because of recent deepwater discoveries in Bohai Bay and the South China Sea, and because of the potential shale opportunity in China. That's a market that's been for the most part closed off to western service companies. The service activity is done primarily by the service entities of the Chinese oil companies, but shale and deepwater activity are things that are going to be done by the traditional western services companies because many Chinese service businesses lack the capabilities and expertise.
The last takeaway, as I mentioned, is a slight negative: Rig rates for floating rigs are starting to moderate. We're starting to see some rigs that are coming down in the $25,000–50,000/day range as they absorb new capacity.
TER: Were any of those surprises?
JW: I would say that the increased optimism on North America was a surprise and so were the rig rates. More CEOs talking about the declines in offshore rig rates was a surprise. It's pretty rare for drilling companies to expect their rigs to drop. They're usually all very optimistic about rigs moving higher.