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The Washington Post: Equipment Makers Profiting More From Oil Prices Than Producers

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National Oilwell Varco has locked in $8 billion in orders. BP’s Thunder Horse production platform, which cost more than $1 billion to build in the Gulf of Mexico, has yet to generate a penny. It was left listing after Hurricane Dennis in 2005. (By Robert M. Reed — Bloomberg News)

Deep-Water Problems Helping Industry Servicers

By Jim Kennett and Amy Strahan
Bloomberg News
Sunday, December 23, 2007; F03

Oil prices above $90 a barrel are doing more for shareholders of Cameron International and Baker Hughes than Exxon Mobil and Chevron. A lot more.

Exxon, the world’s largest oil company; Chevron, the second-biggest in the United States; and the rest of the industry are struggling to increase production and profits because the most promising new fields are miles beneath the ocean. Their difficulties are making Houston-based Cameron and Baker Hughes richer, since they provide the valves, pumps and fluids needed to extract crude from the waters off Brazil to the Arctic Ocean.

Producers will spend a record $369 billion on energy projects next year, 11 percent more than in 2007, Lehman Brothers Holdings estimated on Dec. 7. Services and equipment companies will return 22 percent in the next 12 months, double the gains of the oil companies, according to Sanford C. Bernstein & Co. forecasts.

Equipment makers are “a better place to be than the integrated oil companies because they’re still a growth industry,” said Cato Brahde, a portfolio manager at the British hedge fund Tufton Oceanic. They’re in a “long-term sweet spot,” he said. Tufton’s $1.2 billion hedge fund is up 22 percent this year.

Even after increasing as much as 153 percent in 2007, services and equipment providers are cheap relative to profits. The 15-member Philadelphia Oil Service Sector Index trades at 16 times earnings, just above the record low in March. The Standard & Poor’s 500-stock index of major oil companies is near its highest price-earnings ratio since 2005.

Producers are facing increasing challenges as governments from Caracas to Moscow cut access to deposits and demand higher royalties. In Russia, Royal Dutch Shell, the second-biggest in the industry, ceded control of the $22 billion Sakhalin-2 gas project to state-run Gazprom. Venezuelan President Hugo Chavez seized assets from Houston-based ConocoPhillips and Exxon.

“National oil companies are becoming more powerful and more protective of their natural resources, so we’ve seen the international oil companies in a big way spend money in the deep water,” said Peter Kinnear, chief executive of Houston equipment maker FMC Technologies.

National Oilwell Varco, based in Houston, locked in $8 billion in orders as of Sept. 30, quadruple its annual sales only four years ago. Cameron’s backlog grew to $4.13 billion. Analysts estimate their profits will increase about 23 percent next year, compared with 3 percent for Exxon. At Shell, based in The Hague, earnings are predicted to decline 8 percent.

Offshore drilling creates difficulties that can be costly for oil producers and profitable for the service companies.

BP’s Thunder Horse, a production platform that cost more than $1 billion to build in the Gulf of Mexico, has yet to generate a penny for Europe’s second-largest oil company.

The 50,000-ton platform, with a deck the size of three football fields, was left listing after Hurricane Dennis in 2005, and undersea parts had to be replaced after a manifold leaked during testing. Pumping is scheduled to start in 2008, three years late and nine years after the discovery was announced.

Reserves at London-based BP have dropped the past three years and production fell in 2006, in part because of the delay. The only way Chevron stopped a three-year slide in production was by buying Unocal in 2006 for $20 billion.

Petroleo Brasileiro, Brazil’s state-controlled oil company, announced last month that the Tupi oil field in the Atlantic may yield 8 billion barrels of crude, making it the second-largest discovery in two decades. Five years after initial drilling in more than 10,000 feet of water, producers still may be a decade away from pumping their first barrel.

To reach the company’s target of extracting 1 million barrels a day by 2015, engineers will need to create systems stronger than any that exist today.

Saijel Kishan in London and John Blount in Rio de Janeiro contributed to this report.

http://www.washingtonpost.com/wp-dyn/content/article/2007/12/22/AR2007122200110_pf.html

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