Bill Stewart, president and chief executive officer of BJ Services Co., is among service-company leaders who are looking for signs of a firming market. "Pricing in the U.S. marketplace has continued to come down somewhat in the current quarter," he says. "It has not begun to firm yet in the U.S. or Canada. There may be some improvement as we move into fall." He is optimistic. "Between now and then, I would not expect it to get worse." Stewart was among service-company executives to address investors at the annual Banc of America Securities LLC energy conference in New York recently. BJ Services' U.S. and Canadian customers seem to have adopted more positive attitudes, he says. "We've heard some talk of budget increases." He doesn't expect North American independents to become overly aggressive. "We're still in a period of confidence-building. If you look at the last up-cycle in 1998-99, there was about a six-month period where activity didn't climb despite higher commodity prices. That's happening now." Companies like BJ Services that provide pressure-pumping services to producers can start to think about negotiating higher prices when the U.S. rig count gets near 900, he believes. "Even at 950 rigs, there will be more pressure-pumping capacity than what the market needs. But the feature in terms of market activity will be more positive attitudes. As we move toward 1,000 rigs, pressure-pumping scarcity will develop and prices will improve significantly." Many producers complained that the last 100 drilling rigs at work during the last boom were significantly less efficient, according to Gene Eisenberg, chairman and CEO of Nabors Industries Inc. "I personally don't buy that," he says. "I think it's more important to look at what happens to the decline rate when drilling isn't taking place. Usually, there's a correlation between efficiency and a slower decline rate. This time, the rig count hasn't come down as much as it did in previous cycles." The ideal would be for dayrates to rise as a function of demand, but not as quickly as they did during 2000-01, says Eisenberg. "We'd like them to rise enough to replace capital investment. One of the important differences, for good or bad, is that a lot of the rigs that the industry has been preparing during the latest down-cycle, will be ready when demand returns. Consequently, rates won't get too high too soon. The markets will be more synchronized. Fewer people will learn the hard way about volatility." Nevertheless, he anticipates "a fair amount of boom" in the next upturn. "If we have reasonable demand growth in 2002, the decline curve will accelerate and more wells will need to be drilled. Most of these will be onshore." U.S. gas drilling peaked above 1,000 rigs during third-quarter 2001. Eisenberg predicts the record will be topped two years from now because of a steeper decline curve. "The question will be whether all these rigs can be put to work profitably." Offshore drilling Offshore, all 24 of Rowan Cos. Inc.'s rigs are under contract, a first time in more than a year, according to chairman Bob Palmer. Among its six Gorilla-class rigs, Gorillas II, III, IV and VI are operating on well-to-well contracts in the Gulf of Mexico, and Gorillas V and VII will commence operation in eastern Canada and the North Sea this quarter. "This is a very positive event greatly reducing, for the moment, an uncertain outlook," Palmer says. "We are particularly encouraged by the fact that about one-half of our Gulf of Mexico rigs are on deep Miocene prospects, with well depths in the range of 15,000 to 22,000 feet." Offshore drilling markets clearly are in transition, he adds. "Either dayrates will continue to go up or utilization will begin to go down. Stay tuned." Meanwhile, Global Santa Fe Corp. reported a 1% improvement in its worldwide SCORE (Summary of Current Offshore Rig Economics) during May to 44.0% of the dayrates necessary to justify speculative new rig construction. The increase reflected continued improvement in the Gulf of Mexico jack-up rig market as independents ramped up drilling programs following several months of stable U.S. gas prices, says Sted Garber, president. "With heightened Gulf drilling activity reducing excess jack-up capacity, the concern subsides that Gulf-based rigs will move internationally and upset the balance of rigs in those markets," Garber says. "On the other hand, the semisubmersible market in the North Sea is beginning to show signs of softness as the major oil companies pull back spending to prioritize their best drilling prospects." Diversification Service and supply companies have been positioning themselves to withstand cyclical downturns by diversifying their products and services. Varco International Inc.'s results in the 1970s directly reflected rig activity. Today, it is significantly more diversified, although it remains closely linked to the latter part of the production cycle, says George Boyjdieff, Varco president and CEO. The company's drilling and tubular services division inspects and coats pipe. "This is a business that follows drilling activity directly," he says. "Right now, it's the one that's lowest in the cycle-and it's the one that's going to start as the cycle picks up." Varco's drilling-services division, meanwhile, combines its solids-control and instrumentation businesses. Boyjdieff expects its results to improve later this year as producers start to drill more wells because some of them will be difficult, but potentially prolific, prospects that require more services. Meanwhile, the company's drilling-equipment and wireline group is working through a backlog of orders from the last drilling surge. Boyjdieff concedes the division is "at the bottom of its pop and should stay there for a couple of quarters" because it is tied to the large service companies, which spend money when times are good. But the sector's revenue continued to grow in fourth-quarter 2001 when service companies' sales generally contracted, he says. Hydril Co. Inc. laid off about a third of its plant workforce in January, when utilization dropped to 55%, according to Christopher Seaver, Hydril president and CEO. But the supplier of premium well connections plans to rehire some of those employees soon. "We want to avoid overtime and still meet rising demand. But we don't expect to increase any prices before the end of the year," says Seaver. "Our new machine tools should help us reduce costs and increase productivity. But we also have to retrain machinists to use the new tools, so we don't expect productivity to improve before the end of the year." Hydril's products are used in very difficult, deep-formation oil drilling. The company also is leveraged to deep gas. "The National Petroleum Council estimates that half the remaining gas in the U.S. is deep gas that requires premium connections to produce. These are metal-to-metal connections that hold better than connections that are plastic, which is particularly important when you're talking about a 20-year well life, often operating under high pressure on temperatures," Seaver says. On the deep shelf, a 15,000-foot well uses more than twice the premium connections as a 10,000-foot well-and a 20,000-foot well uses more than seven times the connections. Deepwater development Other oil-patch companies also are poised to benefit as deepwater-resource development grows. "Major oil companies need to replace production, and they're going to where the oil is-the deep water," says William H. Schumann III, senior vice president and chief financial officer of FMC Technologies Inc. "That's where our best business is. We think we're uniquely positioned in the oil-service sector to participate in deep water's growth." Fully independent from FMC Corp. since December 2001, FMC Technologies is learning to function as a smaller operation by using a net contribution management approach that excludes factors such as goodwill, he says. "Our customers return fewer of our products than our competitors'. We also have tried to manage our balance sheet so that our capital returns are higher than the rest of our industry." The company reported returns on capital of 13% in 2000 and 14% in 2001, and hopes to reach 15% this year. It intends to develop product-development alliances with multinational oil companies as its subsea business grows, says Joseph H. Netherland, chairman, president and CEO. "Subsea margins still are a function of which customers buy units. Of the 1,000 offshore wells that are completed worldwide each year, only about 250 are subsea," he says. The impact would be major if Royal Dutch/Shell went to a standard subsea system, for example.