Boom and consolidation to reshape rig industry?

Orders for newbuild floaters and jackups have surged to the highest level in years. But will tight shipyard capacity squeeze some drillers out of the market? Russell McCulley rounds up some opinions on the drilling business circa 2011, including a forecast of greater industry consolidation.

New rig construction began to pick up in 4Q 2010 and accelerated in the first quarter of 2011, when Noble Corp announced new orders with Hyundai Heavy Industries for three ultra-deepwater drillships, worth more than $600 million each, and two of a possible four high-specification jackups with Sembcorp Marine's Jurong Shipyard. Shortly before announcing in February the acquisition of Pride International, Ensco placed an order with Keppel Fels for two new harsh environment jackups, with an option to build two more, at a cost of around $230 million each. Also that month, Transocean said it had contracted with Keppel Fels for the construction of two $200 million high-spec jackups to be deployed offshore Thailand. And in late March, Sevan Drilling announced plans for two COSCO-built ultra-deepwater drilling rigs, at $525 million each, with an option for two more rigs.

During the first three months of the year, Barclays Capital said in a report released early April, drilling companies ordered 19 jackups and 16 drillships or semisubmersibles, bringing the six-month total to 37 orders for jackups and 28 for new floaters.

At the end of 1Q 2011, companies held options to build another 26 jackups and 15 floaters, most of which would likely be exercised over the next year, Barclays said.

The orders continued in April, with the announcement that Maersk Drilling had placed a $1.3 billion order with Samsung Heavy Industries for two ultra-deepwater drillships, following a February order for two harsh environment jackups from Keppel Fels. Also that month, Seadrill exercised an option with Samsung for a new drillship with a 3Q 2013 delivery, on the heels of a November 2010 order for two ultra-deepwater drillships, while Norway's Fred. Olsen Energy announced that it had placed a $615 million drillship order with Hyundai Heavy Industries, to be delivered 3Q 2013.

Over the course of 2011 and the following three years, if all outstanding orders currently in the system are completed, an additional 53 drillships, 68 jackups and 28 semis will join the worldwide fleet, according to ODS-Petrodata statistics.

A number of factors are fueling the increase in rig construction, not least the almost unanimous projection among analysts for a rapid increase in worldwide energy demand over the next few decades. ‘The increasing demand for hydrocarbons worldwide is encouraging exploration & production companies worldwide to explore and drill in newer regions, deeper waters, geographically challenging and harsh environments, with better operational efficiency,' GBI Research said in an e-mail response to questions. The firm expects growing demand for premium and ultrapremium jackups, capable of drilling in depths of up to 625ft, to create a shortage of the high-spec rigs by 2015.

Deepwater and Arctic exploration is also driving the move toward more sophisticated rigs, GBI said, noting the advanced drillship capable of working in Arctic ice in development at Samsung. ‘Technological developments in offshore rig construction could be the only enablers for successful exploration (and) production in geographically challenging areas, and for the exploitation of energy reserves worldwide,' the company said.

That drive toward more ‘innovative rig designs,' GBI said, could be hastened by tighter drilling regulations imposed or under consideration in many countries in the wake of the Deepwater Horizon disaster.

Despite the global economic crisis that began in 2008, relatively few rig orders were cancelled, said IHS CERA senior advisor Candida Scott.

‘I think it's a consequence of an aging current fleet,' Scott said. ‘There were quite a few orders placed prerecession, but those orders have continued. And that's a recognition that some of the older fleet has to be retired, and no longer have the capacity to be drilling in the deeper waters, the deeper reservoirs that are required going forward.'

So far, she said, neither the recession nor deliveries of new rigs have suppressed day rates. ‘Generally, we're seeing rates continue to slowly creep up, if you look at them on a global basis.'

Some analysts, however, have warned that deliveries in the current construction cycle could put pressure on day rates. GBI Research noted that about half of the rigs under construction in early 4Q 2010 did not have firm contract commitments. ‘The increase in the number of rigs is expected to rise, as more than a hundred new offshore rigs are still under construction, expected to be deployed by around early 2013,' the company said. ‘As a result, this could create a situation of supply exceeding demand in the near future, and hence a decline in offshore day rates for rigs.'

The oil & gas building boom has helped Southeast Asian shipyards maintain healthy backlogs throughout the recession, said Scott.

‘It's been quite good for them, because when the recession hit in 2008, general shipping was hit hard. People were trying to get out of orders already contracted, and basically, there was a sort of dearth of shipping orders. So it's great for those yards to see rigs being ordered,' she said.

Barclays Capital report noted the result has been a ‘tightening of capacity for many traditional shipyards'.

‘We believe the majority of slots for deliveries through 2013 are now full. We also believe floater capacity for 2014 at the established yards is now mostly sold out due to recent orders and options.' Rising steel prices and increases in the cost of rig equipment are pushing up construction costs, Barclays said, ‘making priced options more valuable'.

With shipyard space tight, Barclays said, the industry could be in for a new round of M&A.

‘For those companies that have mostly shunned the newbuild cycle thus far, consolidation may be the only near-term option for growth or to replace lost earnings power as shipyard slots at established yards have quickly filled. We believe another round of rig company consolidation is highly likely,' the company said.

Traditional drillers, Barclays said, are having difficulty purchasing ‘oneoff assets, which most had expected to become distressed during the downturn, particularly newbuild floaters, and we expect that several new offshore rig companies have likely emerged as attractive acquisition candidates. Some smaller traditional drillers may also be candidates. In our view, a remaking of the offshore rig industry is underway.' OE

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