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Noble Corp's (NYSE:NE) recent conference call provides insight into the current strength present in the offshore drilling industry that could potentially benefit all of the companies that participate in this industry. Noble also secured several drilling contracts during its fourth quarter that service to provide further evidence of this strength.

Noble states that 2012 was the best year in history for discoveries in the deepwater and ultra-deepwater environments. Exploration and production companies announced a total of 52 discoveries in water depths of 4,000 feet of greater. This exceeds the previous record by 40%. Of these 52 discoveries, eighteen were at water depths of 7,000 feet or greater and nine are at least 8,000 feet deep. This is very promising for owners of ultra-deepwater rigs since these rigs are needed in the development of those resources. It takes at least five years to develop an ultra-deepwater field to a production state. Therefore, oil and gas companies will be continuing to demand ultra-deepwater rigs for years going forward as the companies seek to develop these fields and profit off of these discoveries.

Historically, the vast majority of deepwater and ultra-deepwater discoveries have been made in the "Golden Triangle." The Golden Triangle refers to a region encompassing Brazil, the Gulf of Mexico, and West Africa. As recently as 2008, 80% of deepwater discoveries were made in this area. In 2012, only 47% of the total deepwater discoveries were made in this area. Today, discoveries are being made in areas such as Israel, Australia, Ghana, Mexico, Sierra Leone, Mozambique, Tanzania, India, and the Ivory Coast. This represents global expansion of the industry which is a very promising trend. One reason for this is that a more globally diverse industry is also less susceptible to the policies of any one national government. For an example of why this is a good thing, consider the effect to the industry five years ago if the United States had outright banned all offshore drilling. Such an act would have significantly shrunk the market. Today, such an action would have much less impact on the industry as a whole. I realize that this is an extreme example but it does effectively illustrate why increasing global diversification is so beneficial.

All of the success that E&P companies have been having discovering deepwater fields has led to a backlog of lengthy development projects. According to Noble, this is one reason why offshore drilling rigs have been awarded lengthier contracts over the past year or so than what the rigs would typically be awarded in years past. This also has some benefits to offshore drilling companies. One reason for this is that longer contracts increase revenue visibility for both management and investors. This is because rigs that are contracted out for longer periods of time will be generating dayrate for a longer period of time. As the rig contract specifies the amount of revenue that the rig will generate in a given period, management can easily project how much money will be coming in and so will be more easily able to engage in strategic planning and execute capital spending projects. This is also true for investors attempting to predict the future financial position of a company. Longer-term contracts also provide a hedge against declining market dayrates. Although this is not a problem in today's market, if dayrates were to decline then the offshore drilling company would not see its revenues impacted until it is forced to re-contract out a rig at a lower dayrate. The longer the contract term, the longer a company can ride out a downcycle without being too affected (or at least, not seeing the same impact as a company with shorter-term contracts would). There is also a risk that an offshore drilling company will be unable to re-contract out a rig immediately after a contract ends and there is always some uncertainty about the dayrate that will be awarded. While that is also a risk that is diminished due to the very tight supply-demand balance in the market today, it is also an advantage of long-term contracts: they reduce that risk.

Noble's own contract awards in the past few months provide proof of these trends and overall industry strength. As a part of its fleet modernization program, Noble is constructing six JU3000N jackups. The JU3000N is a very capable jackup design, capable of drilling wells up to 35,000 feet deep in up to 400 feet of water. As Noble stated in its conference call, the company recently secured contracts for two of these rigs at solid dayrates. The two rigs that the company recently contracted out are the Noble Houston Colbert and the Noble Sam Turner. Here are the details on those contracts:

Source: International Hedges

These two contracts added $243 million to Noble's backlog which, at the time of the conference call, stood at $14.3 billion excluding these two contracts. All of the company's JU3000N rigs that have been awarded contracts have secured similar dayrates as the Noble Houston Colbert and the Noble Sam Turner. The Noble Regina Allen, for example, was awarded $235,000 per day for an eighteen-month assignment in the Dutch sector of the North Sea. As the JU3000N rigs are harsh environment rigs, these awards are not indicative of a $200k-plus dayrate for standard or high-specification benign environment jackups. Dayrates for these units are topping out in the $160-$165k per day range. Harsh environment jackups have also traditionally carried longer-term contracts than their benign environment cousins so it is also difficult to draw many conclusions from the lengths of these contracts. However, given the fact that four of these rigs have already been put under contract is an indication of how strong demand is relative to supply in the offshore drilling rig market.

Noble also described the extent of the extremely tight market for offshore drilling rigs today. The company states that the North Sea has no rig availability at all for the remainder of 2013. This has resulted in oil and gas companies operating in the region to contract rigs beyond their actual needs. This is because the supply of rig time is lower than the demand for it so operators are afraid that if they do not secure rigs under contract then the rigs may not be available when the operator needs them. Noble states that a similar dynamic is present in the Middle East.

This tight supply-demand dynamic is likely to affect the offshore drilling industry for the next few years. This should prove quite beneficial to all the offshore drilling contractors as oil companies offer higher and higher dayrates for rigs in order to secure the capacity that they need to meet their own respective development goals.

Source: Noble Corp. Provides Further Insight Into Strength Of Offshore Drilling Industry