The bulk of new discoveries we’ve been hearing about over the past couple of years—at least the big ones—are offshore, many of them in ultra-deep waters. Shallow discoveries are fewer and farther between because most of the sweet spots have already been found.
So as exploration gets deeper, so too must the drilling rigs, and they have to be more advanced than ever before. This is all looking good for deepwater drilling rig day rates, which are showing some climb due to rising demand.
For 2012, 49% of new offshore discoveries were in ultra-deepwater plays, while 28% were in deepwater plays. What we’re looking at now are amazing advancements in deepwater rigs, with new semi-submersibles capable of drilling to depths of 5,000 feet or deeper. Beyond that, new sixth generation enterprise-class drillships can go to depths of 12,000 feet (think Brazil, the Gulf of Mexico and Angola, for starters).
This market is getting tighter and tighter, and while this year it’s mostly about Africa, the US Gulf of Mexico and Brazil, demand is also increasing (gradually) from Asia and Mexico, too. Not only are we looking now at 6th generation ultra-deepwater drillships, but 7th, too.
One of the most advanced ultra rigs out there is Transocean’s Discoverer Enterprise, which is the first ultra-deepwater drillship to feature dual activity drilling technology that is said to reduce the cost of deepwater development by up to 40%. It’s a multi-purpose vessel that can drill, test and compete wells in depths of up to 10,000 feet (nearly 2 miles), and can drill a well more than 6.5 miles beneath the drill floor. It can conduct simultaneous drilling operations.
Offshore day rates for drillships and semisubmersibles are steadily on the rise, but it’s the ultra-deep market segment that we’re interested in here. We’re looking at who’s got the biggest fleets, the strongest contract backlog and the biggest plans for advanced drillships.
Switzerland-based Transocean Ltd. (RIG) is probably the biggest player on the ultra-deep scene. It’s got 29 ultra-deepwater rigs, out of the 120 in existence worldwide. But we also have some reservations about Transocean.
Let’s start with the positives.
Transocean has its eye on the ultra-deepwater rig market and is giving up some its lower-spec drilling rigs to refocus on where it thinks the real money and potential is. Last year, the company ordered four new ultra-deepwater drillships that will go to Royal Dutch Shell. These rigs have a 94% utilization rate and the day rates settle in about around $500,000 or higher.
Transocean’s market cap is about $17.9 billion and a trailing 12-month revenue of about $9.3 billion. Its cash-to-debt is about $3.7 billion to $11.2 billion, and its dividend yield is 4.5%. It seems to be rebounding from some of its problems, and certainly its footprint in oil and gas drilling is widespread.
According to Transocean’s mid-May fleet update, on top of its existing contract backlog, the company’s new contracts and extensions for this year (beginning in May) will be worth about $262 million. Of this, Transocean’s ultra-deepwater drillship, the GSF Explorer, won a one-year contract to operate offshore India for a $412,000 day rate.
In trading on 21 June, Transocean shares entered into oversold territory, trading for as low as $47.93 per share, according to Forbes.
What we don’t like about Transocean is the liability, though it seems to have weathered the worst of some of its legal storms. In January, it reached a $1.4 billion settlement with the US Department of Justice over criminal and civil charges related to the 2010 Gulf of Mexico spill, and it’s also been embroiled in a lawsuit over the Frade spill offshore Brazil, but criminal charges against Transocean employees have been dropped.
There’s also been a lot of drama involving one of its investors, Carl Icahn, who has been pushing for higher dividends and an overhaul of the board of directors. In May, shareholders voted against the dividend increase fearing it would hurt Transocean’s liquidity.
So if Transocean and its liability baggage isn’t your cup of tea, try Rowan Companies, which is also hitting the ultra-deepwater drillship scene nicely this year. It’s just won a contract from Anadarko Petroleum (one of our favorites) for the Rowan Resolute, which is one of four ultra-deepwater rigs Rowan has under construction right now. The Rowan Resolute will be delivered in the second quarter of 2014, and is being built by Hyundai Heavy Industries at a South Korean shipyard. The contract is for three years in the US Gulf of Mexico and the date rate outshines what Transocean has managed—it will be at least $600,000, according to Rigzone.
Rowan doesn’t have the contract backlog that Transocean has right now, but the Anadarko contract will boost that 20% to about $4 billion and will go a long way in helping Rowan to get its other three ultra-deepwater drillships built. Now Rowan has 50% of its ultra program contracted out.
Here’s something potentially bigger … Seadrill Ltd. (SDRL), which has a 100% utilization of its ultra-deepwater drillships.
Seadrill will take delivery this year of two new ultra-deepwater drillships (plus 7 other rigs), and for 2014 it expects another four ultra-deepwater drillships from the Samsung shipyard in South Korea.
In April, Seadrill inked a contract with LLOG for its West Neptune ultra-deepwater drillship to begin operations in the spring of 2014 in the US Gulf of Mexico with a day rate of $570,000. The contract runs for three years, with a one-year extension option.