Since September, oil has been kind to investors. It matters little what area was invested, as most companies are up significantly over that time frame. There is a plethora of places to put your money, so finding value is the key. The offshore drilling industry is complex, and generally sells at a discount to other oil service stocks. As with land drilling, much of the offshore "easy" wells have been drilled. Companies with technology to drill in deeper water and harsh climates will have higher utilization and day rates.
Transocean (RIG) is probably the best known offshore company. The Deepwater Horizon tragedy on April 20th is regrettably the main reason for this, but for those who are familiar with the business would agree Transocean has some very good high spec offshore rigs. After its merger with GlobalSantaFe, Transocean increased the size and scope of its company:
- 139 Mobile Offshore Drilling Units
- 65 Jack-up Rig Drilling Units
- 71 Drillships and Semisubmersible Rigs
- 40 Rig That Can Operate in 4500 Feet and Greater
Transocean is the premier company in the ultra-deepwater segment. 2010 revenues were $9.6 billion. Revenue by rig type was:
- 33% Ultra-Deepwater
- 26% Midwater
- 18% Deepwater
- 16% Jack-ups
- 7% Other
Contract backlog is $24 billion, and more than half of this is in the ultra-deepwater division. Transocean maintains that there is strong demand for ultra-deepwater, harsh environment, and high spec jack-ups. Transocean currently has 11 jack-ups available to contract, but sites the possibility to contract 8 in the short term. Of the 350 total global jack-ups, 51 are sitting idle.
Transocean's midwater units are seeing steady demand. It has 2 available for contracting, and 9 will be available next year. Of the 102 in the global total midwater fleet, 5 are idle. Transocean reports stable day rates. Deepwater demand has been slow, nevertheless, day rates have been decreasing. Transocean has 2 idle units, while 5 of the global fleet are not contracted. Ultra-deepwater has utilization over 95%. Transocean has reported this group will see increased demand throughout this year. There are currently no idle ultra-deepwater units globally. Looking at Transocean's contracted rigs, they break down as:
- 96% Ultra-Deepwater
- 72% Deepwater
- 75% Midwater
- 67% High-Spec Jack-ups
- 46% Standard Jack-ups
In summary, Transocean is well placed in the ultra-deepwater and high spec jack-ups market. Deepwater and midwater rigs are experiencing some demand, but not enough to push day rates up. Overall, Transocean could start to see demand pick up tremendously with the price of oil.
Diamond Offshore (DO) is levered to deep water. It currently has five rigs that can drill at depths over 10,000 feet. In 2013 it will increase this number by 2. Rigs between 5000 and 9999 feet number 8. Of these 15 rigs, Diamond has a backlog of $3.5 billion. Of its 16 midwater rigs, the company's backlog is at $2.6 billion. Two midwater floaters will be free in June of this year.
Diamond has a current net debt to cap of 4%. Comparing Diamond to its competitors shows its financial strength:
Diamond is the largest player in Brazil. Currently there are 64 rigs in Brazil and they break down as follows:
- Diamond Offshore-16
In summary, Diamond Offshore is a great play on deeper water. The company does not have any of the jack-ups that are finding difficulty getting contracts. Diamond has also moved many of its rigs out of the Gulf of Mexico and now has just 2 in this region. Look for utilization to stay high for this company.
Noble (NE) has a total of 76 rigs. The types of rigs are:
- 14 Semisubmersibles
- 13 Drillships
- 47 Jack-ups
- 2 Submersibles
Noble also has the second largest backlog in the industry. Industry backlogs break down as:
- Transocean (RIG)-$24.66 billion
- Noble (NE)-$13.03 billion
- Seadrill (SDRL)-$12.3 billion
- Diamond Offshore (DO)-$6.76 billion
- Pride (PDE)-$6.29 billion
- ENSCO (ESV)-$3.00 billion
- Rowan (RDC)-$1.60 billion
- Atwood (ATW)-$1.07 billion
Noble's backlog is mostly for floaters as they are generally have long term contracts, whereas jack-up rigs are shorter term. Noble has been able to increase its position in floaters with an emphasis on dynamic positioning as opposed to moored models. Last year, Noble's dynamically positioned floaters increased from four to eight. This year the number increased to eleven. By 2013 it will have fourteen and 2014 Noble will have 15 dynamically positioned floaters. Noble is also building 4 high spec jack-ups.
In summary, Noble has changed the makeup of its company over the past few years. It seems to have identified the segments of its business with demand and met with supply. Noble is planning on divesting from older jack-ups. The jack-ups that can be upgraded will stay. Noble will add a total of 18 new units from 2007 to 2014. Three drillships will be delivered this year. It has the third largest backlog. It also pays a large dividend.
Seadrill (SDRL) may be the most interesting company in this space. This company has a very high tech, young fleet focused on the areas most in demand in the space. It has the second largest ultra-deep fleet. If we compare Seadrill's ultra-deep fleet to its competitors we see:
The age of Seadrill's ultra-deep rigs is also important:
- Seadrill-2 years
- Ensco-2 years
- Pride-8 years
- Noble-14 years
- Transocean-16 years
- Diamond 23 years
It also has the largest fleet of modern jack-ups. Newer jack-ups have the technology to drill in more difficult areas, and are in demand because of this. Jack-ups built after 2000 with a 350 foot rig water depth:
The average age of jack-up fleets:
- Vantage-2 years
- Seadrill-3 years
- Rowan-15 years
- ENSCO-23 years
- Transocean-28 years
Seadrill's tender rig fleet offers a cost effective alternative to jack-ups. Seadrill has over 60% of the world's tender rig market. Seadrill has also created a new drilling company called North Atlantic Drilling Limited. Seadrill will maintain 75% interest with independent investors owning the remaining 25%. It will be 100% focused on the harsh environment of the North Atlantic Basin. A fleet of six unit:
- One Harsh Environment Drillship
- Three Harsh Environment Semi-submersibles
- Two Harsh Environment Jack-ups
In Summary, Seadrill may be the best option of this sector. It has the newest fleet which has the technology to meet the current environmental demand. Most important is the company's backlog:
- Floaters-$7.9 billion
- Jack-Ups-$2.5 billion
- Tender-Rigs-$2 billion
ENSCO (ESV) and Pride (PDE) are best covered together as ENSCO is in the process of acquiring Pride's shares. The combination of these two companies will create up to $50 million in synergies, a total of 74 offshore rigs. If we include rigs under construction, total rigs include:
- 7 Ultra-Deepwater Drillships
- 13 Dynamically Positioned Semisubmersibles
- 7 Moored Semisubmersibles
- 47 Premium Jack-Up Rigs
This produces the second largest and youngest deepwater (+4500 feet) fleet in the industry. Average age is seven years with a total of 21 rigs. It creates the third largest and the youngest ultra-deepwater (+7500 feet) fleet. It has the largest active premium jack-up fleet (40 rigs). The backlog of the combined companies is $10 billion.
In summary, the two companies will create the world's second largest offshore driller. The new company will be more diversified, and increase overall customer base. I am unsure if I like the merger of these two companies. When Transocean and GlobalSantaFe merged, I saw little advantage for Transocean to take on a jack-up market that not only had lower day rates, and one that is more prone to being idle. I would watch this closely.
Rowan Companies (RDC) has three segments. The company garnered 2010 revenues from:
- Offshore 56%
- Manufacturing 33%
- Land 11%
In 2010, EBITDA was 85% offshore. Rowan has 28 jack-up rigs. 16 are high-spec cantilever, 9 are premium, and 3 are commodity jack-ups. There are 3 high-spec jack-ups under construction. Although demand for jack-ups are at 69% world wide, high-spec jack-up utilization is 84%. These jack-ups are receiving approximately $200,000/day.
Rowan's jack-ups average 17 years of services. By 2013, Rowan estimates it will own 19 of the world's 49 high-spec jack-up rigs. Rowan has seen its backlog grow recently, logging $1.5 billion in commitments since 2010. Much of demand is reported from the Middle East and North Sea. Since January of 2010, Rowan has added 6 high-spec jack-ups to its fleet and 3 in construction.
In Summary, Rowan is an interesting story. The company has a very large footprint in high-spec jack-up rigs. It also has a land drilling business that seems well suited to horizontal drilling. Its manufacturing business also blends well with the rest of the company. Rowan has stated that it will see an increase in revenues and margins for 2011 in its manufacturing business. This company has done a good job of increasing its jack-up presence in areas of demand.
Atwood Oceanics (ATW) has consistently increased revenue and earnings since 2005. Atwood is currently expanding its fleet into ultra-deepwater, deepwater and high spec Jack-ups. Rigs contracted in 2011 are:
- Ultra-Deepwater Semisubmersible-$470,000/day
- 3 Deepwater Semisubmersibles-$300,000/day to $538,000/day
- 3 Jack-Ups-$90,000/day to $133,000/day
Atwood has other rigs available:
- Ultra-Deepwater Drillship-2013
- Ultra-Deepwater Semisubmersible-2012
- 3 Jack-Ups-2012 to 2013
Atwood asserts that many of the jack-ups on the market will have to be replaced as 328 rigs have been in service for 30+ years. There are 136 floaters with this many years of service also. Atwood has stated that it will be spending $190 million on the Atwood Osprey and Condor this year. Between 2012 and 2014 expect additional expenditures of $1.2 billion. Debt will increase to $850 million by the end of 2014. Atwood will add 3 ultra-deepwater drillships and 3 jack-ups by 2014.
In Summary, Seadrill seems to be well placed in the upcoming offshore drilling market. Although I believe the offshore drilling sector will go higher, a few of these names are better placed than others. Look for companies that have exposure to ultra-deepwater. This is the most important as day rates will probably increase more than other areas, and utilization is already at 100%. When these contracts come up for renewal, much higher day rates will be seen. With oil over $100/barrel, many of the deeper plays will start to look more appealing. Dynamic positioned deepwater rigs should also see additional utilization. If history repeats itself, we will see the same increased day rates as in late 2007 to early 2008.
Disclosure: I am long SDRL.