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A Deepwater Dilemma

For the last couple of years, the deepwater drillers have been telling us that a recovery in day rates that would provide meaningful support for their share price, was right around the corner. A recovery that was a couple of quarters away at the most, as they have proclaimed in flashy investor packets as seen here.

I have been a stalwart supporter of an eventual recovery in deepwater exploration that would provide this boost. It just makes sense. A significant portion of the world’s oil supplies come from this compartment currently. For example, Rystad estimates that about 20 percent of U.S. daily production is produced from deepwater. Globally this figure rises to about 10 mm BOPD, according to Rystad estimates.

The slide above shows that even with the contributions of the massive Shell- Appomattox and Vicksburg Gulf of Mexico projects, U.S. daily oil production from deepwater will fall.

The ugly truth, however, is that day rates have not moved meaningfully from the low ebbs of 2016. Recent tenders have been disappointing. An example would be Seadrill LP’s, (NYSE: SDLP), 1-year, $72 mm contract commitment for the West Polaris, commencing in Q-1, 2020. This works out to $180K/day for a state of the art UDW drillship just out of the shipyard in 2018. This does not inspire confidence in SDLP as an investment.

In a rational market, we would be seeing oil companies scrambling for rigs. Having seen the worst collapse in oil prices on record…




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