BAS: High steel prices to weigh heavier on producers than service firms

By OGJ editors
HOUSTON, Apr. 20 -- Higher steel prices are likely to weigh more heavily on oil and natural gas producers rather than services and supply companies, according to James K. Wicklund, analyst with Banc of America Securities LLC.

In a recent research report, Wicklund observed that the price of hot-rolled coiled steel has increased 71.2% since yearend 2003. The primary cause for the rise in price, he said, is an increase in demand for steel in China, which consumes about 30% of the world's supply. The higher price has impacted raw material costs and pricing for many energy companies, Wicklund said.

As an example, Wicklund noted that Dallas-based casing, tubing, and line pipe producer and marketer Lone Star Technologies Inc. reported a $42/ton surcharge at the start of the year for all of its oil field product shipments. In February, the surcharge was replaced by a $60/ton surcharge and in March, with a $125/ton surcharge.

Robert Morris, BAS exploration and production analyst, reported that steel represents about 5-15% of total drilling costs, with onshore drilling programs feeling the greatest impact. Also, Morris reported that a few E&P firms indicated a 0.3-1.9% budget increase for every $100/ton increase in steel prices.

Wicklund said, "Within our coverage universe, the drillers, casing/tubing service providers, and capital equipment providers will most likely be affected by higher steel prices, though any impact should not be significant."

"For the land drillers, higher drill pipe costs represents less than 5% of total operating costs and these cost are generally passed on as higher day rates. Higher costs incurred in newbuilds and upgrade programs for the offshore drillers could be an issue if the steel has not already been purchased.

"For other companies, most have been able to pass on the higher steel costs, mitigating any potential margin weakness. We expect to hear confirmation and greater clarification during the upcoming [earnings] conference calls," he concluded.