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Will the Good Times Continue for Drillers?

Which drillers will survive the inevitable bust?

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In the past few years, onshore and offshore drillers have revitalized after suffering through a two-decade downturn. Due to low commodity prices in the 1980s and 1990s, drillers' profits were often meager. Many of the smaller companies went out of business or were acquired by their larger peers. The industry boom and bust cycles were short and often painful, while not long enough to encourage any sustained industry investment into their aging rig fleets. For the most part, customers were developing conventional formations and had little need for advanced technology to drill wells.

Since 2004, significantly higher commodity prices have reversed drillers' fortunes. Customers have been eagerly investing in exploration activity, and they are seeking to develop economical discoveries. The demand for rigs is so great that drillers have benefited from raising prices, as operating margins have grown from low-single digits to 20% or more in the case of land drillers in Morningstar's coverage universe, and 50% to 60% for a few offshore drillers. For the first time since the 1980s, there is extensive rig-building both onshore and offshore, as drillers are flush with cash. There are labor and equipment shortages, and shipyards have rig order books that stretch out for years to come. It has been a highly lucrative couple of years for drillers. But will good times continue to last? Which companies will survive the inevitable bust?

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.