An economic modeling technique is employed to determine the profitability of various market segments for drilling contractors. Based upon the historic supply of and demand for oil and gas well drilling services, the model provides data for use in strategic and capital planning.
An engineer once said, "If you laid all the economists in the world end-to-end, they would never reach a conclusion". This bit of humor expresses most people's frustration when dealing with economic forecasts and those who produce them.
In defense of those who work in this field of endeavor, they are not working in a static system with clearly defined, unchanging laws and constants. The only constant an economist can count on is change itself. The dynamic nature of the American economy and the very freedom of choice it allows those who participate in its workings is this nation's greatest strength. It is also the source of most consternation to the economist. The myriad of variables (choices) makes forecasting a difficult task; especially since forecasting models are static by nature.
A forecast, by definition, is a prediction of some future, impending occurrence. Most forecasts are based on the premise that "history repeats itself". In other words, given the same set of historical circumstances, the outcome will logically be the same.
An economic model recognizes these circumstances, measures how they interact with one another at various (static) points in time, and predicts the outcome.
If the circumstances remain unchanged; if the model recognizes 'all circumstances; and if the model knows how to measure accurately the interaction among the myriad variables, then it is a perfect model and will forecast with 100% accuracy.
Since all of the above "ifs" seldom recur simultaneously, most economists must settle for some degree of accuracy and then explain which of the "ifs" caused the distortion. Therefore, a good forecast will provide a reasonable approximation of future values. It must include clearly defined assumptions for base case variables and definitions of how the variables have or will interact.
Because business results are measured by financial statistics, economic models used by the business world are expressed in financial terms. Simply stated, they attempt to forecast revenues, costs and profits over a specific time interval. The more distant the future time interval is from the present, the more change can be introduced into present, the more change can be introduced into the model and the forecast will necessarily be less accurate. For the purpose of this discussion, time, as a variable, is defined by two distinct periods: the near-term and long-term.
At Delta Drilling Company the near-term is defined as the current quarter. This is because the current quarter usually is a mixture of actual results and forecasted performance. The model under consideration in this paper is not used in the near-term forecast.
Long-term forecasts, at Delta, are defined as the next quarter and seven (7) years beyond. The Drilling Model under discussion is used to produce these long-term financial forecasts. The results of the model are used by lending institutions, by investor groups, and to satisfy requests from the Securities and Exchange Commission and other regulatory bodies.