Rig Market Review

April 14, 2013

The global rig market is strong, with high utilization, high day rates, and nearly 200 offshore drilling rigs under construction. Drilling contractors are changing their fleet makeup, modernizing, streamlining, and concentrating on market sectors. National oil companies are assembling their own fleets of non-competitive rigs.

The global recession, followed by the drilling moratorium after Macondo, created extreme conditions in the US offshore market in 2009-2011, and many drillers took a hit, reflected in stock prices that have not yet fully recovered.

As oil prices diverged from natural gas prices, E&P companies have shifted drilling programs to target oil, driving demand for drilling rigs, increasing fleet utilization, day rates, and building a backlog for the worldwide drilling fleet.

Rig utilization rates have improved over the past 12 months. According to Rigzone, as of 28 March 2013, there were 600 rigs working out of a total offshore fleet of 708 (575 of 677 competitive rigs), representing a utilization of 84.7%. This is an increase from 81.4% six months ago and 78.1% 1 year ago.

National oil companies have been aggressively building their offshore rig fleets since early 2011, particularly Petrobras. In addition to dozens of rigs currently under construction, the NOCs already run significant rig fleets: ONGC (10), PDVSA (26), Pemex (19), Petrobras (16), and Azerbaijan’s Socar (17).

Deepwater

Seadrill CFO Rune Magnus Lundetrae told investors at the Howard Weil 41st Energy Conference in March that despite a “massive influx” of new rigs since 2005, he sees a limited supply of ultra-deepwater rigs. Since 2005, 107 additional UDW rigs and 138 jackup rigs have been delivered and absorbed by the market, and yet offshore oil production has decreased by 4%, according to Seadrill. Magnus believes significant new capacity is needed to maintain offshore oil production, as aging fields have a higher decline rate.

In late February, Macquarie Capital analyst Nigel Browne noted that drilling stocks underperformed last year, and that “valuations right now are still relatively low on a historical basis, especially names levered to North America.” But he says that “investors have really embraced the whole deepwater drilling story, which in turn reflects confidence in sustained crude oil demand. The most prolific, new sources of oil are in the deepwater frontier regions and we are starting to see the huge uptick in demand for services that target those reserves…

Browne noted that stock prices in the deepwater/subsea segments increased over the past two years. But, “the large-cap diversified names have lagged and current stock prices do not fully reflect their exposure to the inflection in growth - especially deepwater rig count, which is forecast to grow ~12% /year over the next two years.”

In the “Deep & Ultra-deepwater Market Report to 2016, analysts at Infield Systems Ltd. see four development trends: deep water, harsh environment, remote areas, and smaller developments. The key basins are the Lower Tertiary in the Gulf of Mexico, the Arctic, Brazilian deepwater, and East African offshore gas provinces. Infield notes Petrobras, ExxonMobil, Total, BP, Chevron, and Shell amoung the more significant deepwater operators.

Shallow water

When drilling resumed in the Gulf of Mexico, following the post-Macondo shutdown, demand surged for shallow- water rigs and companies such as Hercules Offshore, with 54 rigs, began to shake off years of losses.

At the Howard Weil Energy Conference, Hercules said their domestic offshore utilization rate improved by about 10% in 2012, and that leading edge day rates are up ~60% year-over year for 200ft mat-cantilever (MC) rigs in the US Gulf of Mexico and they are reactivating stacked capacity. Recent contracts in the Gulf of Mexico are averaging 6-12 months or longer, compared with prior contracts of 3 months or less. Hercules runs the third-largest fleet of jackups worldwide and the world’s largest liftboat fleet (64), with a core in the West Africa market.

The jackup fleet has been near full utilization since Q4 2011. In the Gulf of Mexico, three operators account for approximately 42% of jackup demand: Apache Corp. (19%), Chevron Corp. (11%), and Energy XXI (Bermuda) Ltd. (11%). Others using jackups include EPL Oil & Gas Inc. (8%), Arena (6%), W&T Offshore (6%), and then 16 other operators leasing only one or two rigs.

According to ODS-Petrodata, the current international demand for jackup rigs is 375, a historical peak. Demand in most major international jackup markets (Mexico, West Africa, Middle East, North Sea, SE Asia) has surpassed the prior peak in October 2008 of 334. Current excess marketed capacity of jackups is only 28, with only 20 rigs stacked.

In 2015, more than 289 jackups will be more than 30 years old. According to Pareto Securities, scrapping and conversion of older jackups increased in 2011 and 2012, and is expected to continue.

The North Sea fleet is aging, with high-spec jackups averaging 18 years old. But nearly 90 jackups are under construction worldwide and most will enter the market this year. New jackups need to be able to drill deeper wells, and require updated equipment.

Rig rates, utilization

Utilization is high for competitive offshore drilling rigs, ranging from 80% for drilling barges, 83.1% for jackups, 87.5% for drillships, and 88% for semisubmersibles (Rigzone, 28 March 2013). Drillships have shown the greatest increase from a year ago, up 30.4%, with 80 competitive rigs in the market now. Semisubs show the next highest improvement, up 10.4% from a year ago, with 191 competitive rigs in the market. There are 30 drilling tenders in the market, and utilization is 83.3%, essentially flat from last year (82.8%).

IHS Petrodata day rate indices track competitive mobile offshore drilling fleet day rates and utilization for four rig categories: US Gulf of Mexico jackup rigs, northwest Europe jackups, mid-water depth (2001ft-5000ft) semisubmersibles, and deepwater (5001+ft) floating rigs.

As of March 15, the IHS Petrodata US Gulf jackup day rate index hit a four-year high of 487, reflecting the greatest variation of all four rig categories. The fleet utilization averaged 68% for both February and March 2013, up 10% from a year ago. Demand for 250 to 300ft jackups is raising day rates and increasing utilization.

Utilization of jackups off northwest Europe remained at 90% in March, the same average over the last 13 months. The IHS Petrodata day-rate index for European jackups dropped 13 points to 599, but remains 112 points higher than a year ago.

Utilization of mid-water-depth semisubmersibles has remained steady at 79% for the past three months, slightly higher than the average for the past 15 months, but below the short-term spike seen in November-December 2012.

The day rates for deepwater floating rigs are improving and utilization has approached 100% for the last three years, spurring construction of new units. The IHS Petrodata day-rate index increased slightly in March, a slight improvement over a year ago, still about 33% higher than two years ago.

Rig construction

Yard prices for newbuild ultra-deepwater vessels reached a high of about $775 million in 2008, but have dropped to about $530 million, although day rates have now reached the same high as in late 2008.

There are 74 drillships under construction at yards in South Korea, China, and Brazil. The South Korean yards have 51 drillship contracts, at Daewoo Shipbuilding & Marine Engineering Co. Ltd. (DSME), Hyundai Heavy Industries (HHI), Samsung Heavy Industries, and STX Shipyard, Jinhae. The ships are on order from 14 drilling contractors: Atwood Oceanics (3), Diamond Offshore Drilling (4), Dolphin Drilling (1), ENSCO (3), Maersk (4), Noble Corp. (4), North Pole Drilling (1), Ocean Rig ASA (4), Pacific Drilling Ltd. (4), Queiroz Galvao Oleo e Gas SA (1), Rowan (4), Seadrill Ltd. (6), Transocean (6), and Vantage Drilling (2)

China began taking turnkey drillship contracts away from the South Korean shipbuilding giants a few years ago. Three drillers currently have ships under construction in China, including Noble (1) at the STX yard in Dalian; Reignwood Group’s subsidiary Opus Offshore (2) by China State Shipbuilding Corp. (CSSC) at the Shanghai Shipyard; and Vantage Drilling (1) at the Cosco Dalian Shipyard.

Two Brazilian shipyards are building 23 drillships are under construction in Brazilian yards.The Estaleiro Atlântico Sul (EAS) yard in Pernambuco state and the Estaleiro Jurong Aracruz (EJA) yard in Espirito Santo state.

There are 20 semisubmersibles under construction in South Korea (7), China (6), Brazil (6), and Singapore (1). Frigstad Offshore has two, and China Offshore Services Ltd. (COSL) and North Sea Rigs AS each have one at the CIMC Raffles Shipyard, China. Sevan has two cylindrical drilling units being built at the Cosco Shipyard, China.

There are 13 drilling tenders under construction in China (10), Lumut, Perak, Malaysia (2), and Keppel FELS Singapore (1). The Chinese yards building tenders include: Cosco Guangzhou (3), Cosco Nantong (3), Dalian (2), and Rongsheng Shipyard (1).

And there are 84 jackups under construction at yards in South, Southeast, and Far East Asia, as well the Persian Gulf, Caspian Sea, and the Keppel AmFELS yard in Brownsville, Texas.

Construction market

In January, the Energy Research Group at GBI Research released a report on the offshore rig construction market to 2016 and current rig deployment scenario for jackups, semisubmersibles, and drillships. Not surprisingly, the analysts say that the rig construction market is “linked to the demand-supply scenario of offshore rigs worldwide, which both directly and indirectly affects offshore rig day rates, and the availability and deployment of rigs globally.”

The study says that rig designs promoting better safety conformation and increased operational capabilities are key to newbuild orders. It also stresses that rig contractors currently prefer to acquire rival companies as part of their business strategy, an option that has become commonplace over the past years.

Among the trends, cited by GBI:

  • Demand for semisubmersibles and drillships expected to rise as E&P companies venture into deepwater and ultra-deepwater basins.
  • High offshore day rates are pushing demand for rig upgrades in the form of new changes in blow-out preventers (BOPs).
  • New rig orders are being driven by stringent safety regulations, aging of old rigs, harsh-environment rigs, and sustained high oil prices.
  • Long-term contracts are expected to be strongly favored by E&P operators for leasing deepwater and ultra-deepwater rigs.
  • South Korea is expected to continue as the market leader in the number of newbuild orders for deepwater rigs.
  • The rig equipment business is expected to benefit from the imposition of stringent regulatory norms leading to newer, safer equipment designs.
  • New business strategy by ship- yards to diversify into deepwater rig construction and subsea equipment manufacturing to increase profit margins.
  • Orders for jack-up rigs capable of operating in water depths of 300 ft or more are on the rise.
  • Improved risk assessment is expected to reduce costs and time delays for rig construction projects.

 

Acquisitions

The cost of rig manufacturing and tightening of credit in world markets has affected newbuild rig orders and has led to acquisitions of smaller drilling contractors.

At the end of November 2012, Transocean announced that it had completed its sale of 38 shallow-water drilling rigs to Shelf Drilling Holdings, Ltd., for $1.05 billion. Shelf Drilling is a newly-formed company sponsored equally by Castle Harlan, CHAMP Private Equity and Lime Rock Partners. Transocean president and CEO Steven Newman said the transaction “improves Transocean’s longterm competitiveness by effectively repositioning the company as a more focused operator of high-specification drilling equipment.”

Seadrill was established in May 2005, is domiciled in Bermuda, and run from Stavanger by John Fredriksen, Chairman, and Frederk Halvorsen, CEO. Seadrill acquired Odfjell Drilling (July 2005), followed by Eastern Drilling., then Stavangerbased Smedvig ASA (January 2006), Scorpion Offshore (2011), and Asia Offshore Drilling (2011).

Seadrill is selling its 18 rigs in its tender rig division to SapuraKencana for $2.9 billion, to close this quarter– but will they receive enough to finance a takeover of Pacific Drilling?

Houston-based Pacific Drilling Services Inc. (PACD) has four deepwater drillships in service and four additional drillships under construction at Samsung Heavy Industries: two for delivery in 2013, their seventh rig for delivery in May 2014, and an eighth rig for delivery in March 2015. OE



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