Oilfield Services Industry

As oil and gas prices remain high, I've been researching and investing in various oilfield service companies. In particular, I have been looking at companies that acquire, process, market and sell high quality seismic data worldwide. Oil and gas companies use this data to explore for hydrocarbon accumulations, to develop new oil and gas fields, and to manage those fields in production. Many Seismic oilfield services companies went banktrupt several years ago and hence Wall Street still views them cautiously. That's why there appears to be an opportunity in investing in the  shares of seismic companies.

One of my favorites in the sector is: Petroleum Geo-Services (NYSE: PGS). Briefly, PGS is a technology focused oilfield service company principally involved in providing geophysical services worldwide and floating production services in the North Sea. The company provides a broad range of geophysical and reservoir services, including seismic data acquisition, processing and interpretation plus field evaluation. In the North Sea, PGS owns and operates four floating production, storage and offloading units.

PGS came out with earnings today, which were excellent and provide another glimpse into the cash-flow generating capacity of oilfield services companies and what I think will be the continued cash-flow growth of these companies in 2006.  Is this the peak for these companies? Who knows. But they seem like safe bets thru 2006, especially since the valuations for these companies seem to already be assuming a peak. Below are some excerpts from PGS's earnings report. The comments likely reflect similar situations at other companies and can be used to analyze other potential investments in the oilfield services sector. Of note, PGS generated over $70 million in free-cash flow during the quarter.

Further strengthening in Marine contract market: Streamcontract margins increased significantly from first half of 2005. Strong order backlog and current bidding levels provide the basis for expectations of further improvements in contract performance in 2006.

Strong cash flow and significant reduction in net interest bearing debt: Cash flow from operations of $116.8 million. Net interest bearing debt reduced by $92 million in Q3. The  remaining $75 million of the $250 million 8% Senior Notes, due 2006, have been called for redemption in November at 101% of par value.

Svein Rennemo, PGS Chief Executive Officer, commented:

``Current Global E&P activity has a strong upward momentum, which we see continuing in 2006. Our third quarter results reflect this trend, driven by higher world-wide exploration activity in particular.

PGS' Marine Geophysical contract performance improved significantly and our EBIT margin for marine streamer contract for the quarter was in excess of 25 percent. Demand for 3D contract seismic is currently at historical high levels and we expect a strong seismic market in 2006. PGS order backlog and current bidding levels support this expectation. Demand for multi-client data in the third quarter resulted in late sales in line with our previous expectations.

Our Onshore operations have successfully entered the North African market with two new contracts for a total of three crews in Libya, the first one starting in December. The Nigerian shallow water project commenced in October. Mobilization costs on these contracts negatively impacted the Onshore results in third quarter and for the year.

As previously communicated our Production segment was negatively affected in the quarter by planned maintenance, which significantly slowed down the Petrojarl Foinaven production. All maintenance projects have been successfully completed. We continue to believe that our total FPSO production in second half will be in line with first half 2005.