Drillers on road to recovery

November 1, 2012

Rising day rates and demand for drilling in deepwater environments are helping the offshore drilling sector recover from not just the global economic gloom of recent years but also the post-Macondo drilling moratorium in the US. According to the IHS Herold Offshore Contract Drillers Peer Group Analysis, year-over-year financial performance in 2012 indicates that a representative group of offshore drilling contractors are showing signs of rebounding.

Report author John Parry, IHS principal energy financial analyst, says: ‘This sector faced a perfect storm, and investors did not take kindly to this sequence of events, as witnessed by the stock market collapse of offshore driller equities. The recovery has been agonizingly slow, particularly for Transocean, whose rig was involved in the Macondo incident, and for Diamond Offshore Drilling, which has the oldest fleet among the major offshore drillers and the fewest new rigs under construction, but, it is a recovery, and we started to see a reversal of fortune for this sector in the first half of 2012. Significant earnings gains appear likely for the sector in 2013 and 2014, as energy company clients appear willing to pay higher day rates, particularly for newer, more sophisticated offshore rigs.’

Parry says offshore drillers are continuing a major reinvestment cycle to replace their aging jackup fleets, while also adding more sophisticated floating rigs for deepwater and harsher environments. Worldwide utilization of jackups was the highest in more than two years at midyear 2012. According to IHS Petrodata, there were 474 jackups worldwide, with demand about 384. Total utilization of all jackups was around 80%, but the effective utilization of all rigs actually being market ready was 92%.

In 1H 2012, operators made 22 announcements regarding discoveries in water depths of 4000ft or deeper in 10 different countries, according to IHS. These discoveries were made in an average water depth of 6400ft, with the deepest being 7400ft offshore Mozambique. Parry believes these statistics are buoying the outlook of drillers, who expect a continued uptick in deepwater activity and rig demand.

Ensco and Noble Corporation, which have been upgrading their fleets, appear to hold a relative competitive advantage, according to Parry, aided by their increased exposure to the deepwater and ultra deepwater markets where operators have had recent exploration success. Rowan Companies, a major player in the premium jackup market, has undergone a major restructuring, shedding long-held manufacturing and land-rig assets and reinvesting the proceeds in the deepwater market.

‘In general, Ensco and Noble, thanks to their rising population of newer rigs, are having the strongest margin recovery in 2012,’ says Parry. ‘Of course, operating EBITDA margins also reflect fleet mix and prior contract terms, as well as current rising costs and impacts from the changing compliance environment. Consequently, it may require more time to measure the true extent of the recovery by offshore drillers.’ OE



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