More bad news in oil services

Shares in Lamprell, the Dubai-based company that builds and refurbishes drilling rigs, have plunged this morning after the company warned that profits for the year would be “significantly below current market expectations”.

It is the latest piece of bad news to hit the oil services sector, which has seen a crop of profit warnings and job cuts.

The key line in the Lamprell statement:

Despite a significant order book, it has become apparent in recent weeks that there is a marked slowdown in the Company’s business except for the rig refurbishment business which is currently busy but is anticipated to slowdown in the second half of the year. Lamprell, at this time, expects the out turn for 2009 to be significantly below current market expectations.

The significance of this is that it shows the weakness in the rig market is spreading beyond the US, where rig utilisation has collapsed, while outside the US rig counts have held up much better. Lamprell has customers in the Middle East and Asia. It looks as though utilisation and costs are going to fall in those regions as well: the process just takes time while contracts are worked through. Meanwhile, there are plenty of new rigs under construction which will come on to the market.

Lamprell’s shares are off 27 per cent in the late morning in London, and are down more than 80 per cent in the past six months.

RBS writes in a note this morning:

…this market becomes more competitive and is showing signs of shrinking (rigs that are coming off contracts are not being re-contracted). Therefore, top-line could be lower and margins are likely to get squeezed.

It adds:

On the new build jack-up side, we believe the company has slowed down or stopped work on at least one of its new build contract (with RigInvest) due to funding issues. We had previously highlighted our concerns about this contract and others in the backlog.

The $186m Riginvest contract was one of Lamprell’s great successes of last year.

Bloomberg quotes Richard Rose of Oriel Securities:

We’re cautious on it… Long term, we think it’s oversold. At the moment, we don’t think the sector’s going to turn.

It is great news for all those oil producing companies, both large and small, that are desperate for their costs to fall. Cairn Energy, for example, say the cost of the wells it hopes to drill off the coast of Greenland have already dropped from $100m a time, to a mere $60m.

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