3 Offshore Drillers - Contract Backlog Comparative Analysis, Part II

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Includes: DO, RDC, SDRL
by: Fun Trading

Summary

SDRL, DO and RDC present an excellent technical profile. However, they are fundamentally different when we look at the rig fleet composition.

In a normal situation, owning a modern fleet should be a competitive advantage; however, we are experiencing an atypical business situation and owning brand new rigs is not helping.

I believe these three companies will be able to survive this bear cycle. SDRL will have to restructure its debt soon.

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Image: The Drillship West Gemini.

There are multiple subclasses within the general oil sector that have been deeply affected by the unprecedented crash in oil prices that we are experiencing. In fact, the oil industry is going through its third crash in prices since the formation of the OPEC cartel in the 1970s. The first price crash came in the mid-1980s, a decade after OPEC's formation, which represented about 81% of the entire oil reserves in 2014, according to the organization.

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Subsequently, the second crash came at the onset of the Great Recession in 2008, when oil prices tumbled from over $100 a barrel to below $40.

Finally, the third crash is the present decline, which began in September 2014.

Among the worst afflicted segments is, without any doubt, the offshore drilling industry, where companies had over-leveraged during good times and found themselves in a precarious financial situation when the market quickly turned sour.

This is the source of the problem, thereby offshore companies had to get a high-level of debt, billions and billions of dollars, based on an expected optimistic future revenue. It is easy to blame them now that we know what happened, but it would not be totally fair because no one, and I mean no one, was expecting this total collapse before September 2014.

This series of articles discusses and compares the order backlog (as of 4/1/2016) for key offshore drilling players, such as Transocean (NYSE:RIG), Noble Corp. (NYSE:NE), Ensco (NYSE:ESV), Seadrill Ltd. (NYSE:SDRL), Diamond Offshore (NYSE:DO), Rowan Companies (NYSE:RDC), Ocean Rig UDW (NASDAQ:ORIG), Atwood Oceanics (NYSE:ATW), Pacific Drilling (NYSE:PACD), Paragon Offshore (OTCPK:PGNPQ), Hercules Offshore (NASDAQ:HERO) and Vantage Drilling (OTCPK:VTGDF).

Note: The backlogs indicated below are estimated, the best I could with what I had. The numbers may differ slightly from what the companies will indicate later, including bonuses, zero-rate time, special expenses, mobilization etc.

In the Part II - I will compare the three companies with the second largest backlog and their fleet status situation.

1 - Seadrill Ltd.

SDRL owns the biggest (sharing with Transocean) contract backlog among its peers, with approximately $14+ billion as of 4/1/2016. However, SDRL alone owns a smaller contract backlog of approximately $4.9 billion as of 4/1/2016.

Note: The repartition is based on the backlog generated by each segment in 2016.

SDRL 4/1/2016 2016 2017 2018 2019 2020 D-Rate Mob.
West Navigator 0,0 0,0 0,0 0,0 0,0 0 0
West Polaris 9,0 12,0 3,0 0,0 0,0 490 0
West Capella 9,0 4,0 0,0 0,0 0,0 627 0
West Gemini 9,0 10,0 0,0 0,0 0,0 656 0
West Auriga 9,0 12,0 12,0 12,0 10,0 562 7
West Vela 9,0 12,0 12,0 12,0 11,0 564 7
West Tellus 9,0 12,0 4,0 0,0 0,0 467 0
West Neptune 9,0 12,0 0,0 0,0 0,0 573 38
West Saturn 9,0 0,0 0,0 0,0 0,0 634 0
West Jupiter 9,0 12,0 12,0 12,0 0,0 581 0
West Carina 9,0 12,0 6,0 0,0 0,0 457 0
West Draco 0,0 0,0 0,0 0,0 0,0 0 0
West Dorado 0,0 0,0 0,0 0,0 0,0 0 0
West Aquila 0,0 0,0 0,0 0,0 0,0 0 0
West Libra 0,0 0,0 0,0 0,0 0,0 0 0
Total Drillship 90,0 98,0 49,0 36,0 21,0 51
West Alpha 4,0 0,0 0,0 0,0 0,0 500 0
West Venture 0,0 0,0 0,0 0,0 0,0 0 0
West Phoenix 5,0 0,0 0,0 0,0 0,0 200 0
West Hercules 9,0 1,0 0,0 0,0 0,0 445 0
West Sirius 9,0 7,0 0,0 0,0 0,0 297 0
West Taurus 0,0 0,0 0,0 0,0 0,0 0 0
West Eminence 0,0 0,0 0,0 0,0 0,0 0 0
West Aquarius 9,0 4,0 0,0 0,0 0,0 615 0
Sevan Driller 3,0 0,0 0,0 0,0 0,0 411 0
West Orion 4,0 0,0 0,0 0,0 0,0 586 40
West Pegasus 9,0 12,0 8,0 0,0 0,0 314 25
West Capricorn 9,0 12,0 12,0 7,0 0,0 526 5
West Eclipse 5,0 12,0 6,0 0,0 0,0 340 0
West Leo 9,0 12,0 6,0 0,0 0,0 605 3
Sevan Brazil 9,0 12,0 7,0 0,0 0,0 383 0
Sevan Louisiana 9,0 5,0 0,0 0,0 0,0 350 0
West Rigel 0,0 0,0 0,0 0,0 0,0 0 0
Sevan Developer 0,0 0,0 0,0 0,0 0,0 0 0
Total SemiSub 93,0 77,0 39,0 7,0 0,0 73
West Epsilon 9 0 0 0 0 242 0
West Elara 9 3 0 0 0 312 0
West Linus 9 12 12 5 0 350 0
West Defender 9 12 12 8 0 156 0
West Resolute 0 0 0 0 0 0 0
West Prospero 2 0 0 0 0 155 0
West Courageous 9 12 12 12 18 155 0
West Triton 0 0 0 0 0 0 0
West Vigilant 0 0 0 0 0 0 0
West Intrepid 9 12 12 12 0 156 0
West Ariel 9 12 2 0 0 140 0
West Cressida 1 0 0 0 0 96 0
West Freedom 9 4 0 0 0 225 0
West Callisto 9 12 11 0 0 132 20
West Leda 0 0 0 0 0 0 0
West Mischief 9 11 0 0 0 125 17
AOD I 9 2 0 0 0 173 0
AOD II 9 3 0 0 0 173 0
AOD III 9 6 0 0 0 173 6
West Tucana 9 6 0 0 0 223 0
West Telesto 0 0 0 0 0 0 0
West Castor 4 0 0 0 0 156 0
West Oberon 2 3 3 1 0 172 0
West Titania 2 3 3 1 0 172 0
West Titan 0 0 0 0 0 0 0
West Proteus 0 0 0 0 0 0 0
West Rhea 0 0 0 0 0 0 0
West Tethys 0 0 0 0 0 0 0
West Hyperion 0 0 0 0 0 0 0
West Umbriel 0 0 0 0 0 0 0
West Dione 0 0 0 0 0 0 0
West Mimas 0 0 0 0 0 0 0
Total Jackup 137 113 67 39 18 43
T15 9 12 12 7 0 110 0
T16 9 12 12 8 0 110 0
West Vencedor 5 0 0 0 0 100 0
Total Others 23 24 24 15 0 0
Grand Total 343 312 179 97 39 167
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Note: I added $167 million in total mobilization fee.

2 - Diamond Offshore

Diamond Offshore owns the fifth largest backlog among its peers, with approximately $4.88 billion as of 4/1/2016.

Note: The repartition is based on the backlog generated by each segment in 2016.

DO 4/1/2016 2016 2017 2018 2019 2020 day rate
DS Ocean BlackHawk 9 12 12 6 0 495
DS Ocean BlackHornet 9 12 12 12 4 495
DS Ocean BlackLion 9 12 12 12 0 400
DS Ocean BlackRhino 2 12 12 12 0 400
Total Drillship 29 48 48 42 4
Ocean Courage 9 12 12 14 0 510
Ocean Endeavor 0 0 0 0 0 0
Ocean Monarch 9 1 0 0 0 400
Ocean GreatWhite 3 12 12 7 0 585
Ocean Rover 0 0 0 0 0 465
Ocean Valor 9 12 10 0 0 455
Total SemiSub 30 37 34 21 0
DW Ocean Apex 7 11 0 0 0 285
DW Ocean Valiant 0 0 0 0 0 197,5
DW Ocean Victory 9 5 0 0 0 398
Total Deepwater 16 16 0 0 0
MidW Ocean Ambassador 0 0 0 0 0 115
MidW Ocean Guardian 9 3 0 0 0 220
MidW Ocean Patriot 9 10 0 0 0 400,5
Total Midwater 18 13 0 0 0
JU Ocean Scepter 0 0 0 0 0 115
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3 - Rowan Industries

Rowan Industries has the sixth largest backlog among its peers, with $3.2 billion as of 4/1/2016. Rowan owns four UDWs and jackups, no semi-submersibles.

Note: The repartition is based on the backlog generated by each segment in 2016.

RDC 4/1/2016 2016 2017 2018 2019 2020 2021 2022 2023 D rate
Renaissance 9 4 0 0 0 0 0 0 620
Resolute 9 10 0 0 0 0 0 0 608
Reliance 9 12 2 0 0 0 0 0 602
Relentless 9 6 0 0 0 0 0 0 584
Total Drillship 36 32 2 0 0 0 0 0
Rowan Gorilla IV 8 0 0 0 0 0 0 0 75
Joe Douglas 8 5 0 0 0 0 0 0 157
Bob Keller 9 12 12 12 12 12 12 17 170
Hank Boswell 9 12 8 0 0 0 0 0 180
Scooter Yeargain 9 12 11 0 0 0 0 0 175
Bob Palmer 8 8 0 0 0 0 0 0 205
Arch Rowan 7,5 12 9 0 0 0 0 0 69
Charles Rowan 7,5 12 9 0 0 0 0 0 69
Gilbert Rowe 8 0 0 0 0 0 0 0 69
Rowan Mississippi 9 12 12 0 0 0 0 0 195
Rowan California 6 0 0 0 0 0 0 0 130
Rowan Middletown 9 12 9 0 0 0 0 0 69
Rowan Norway 4 0 0 0 0 0 0 0 363
Rowan Viking 9 2 0 0 0 0 0 0 355
Rowan Gorilla V 5 0 0 0 0 0 0 0 180
Rowan Gorilla VI 9 12 3 0 0 0 0 0 355
Rowan Gorilla VII 7,5 0 0 0 0 0 0 0 185
Rowan EXL II 9 3 0 0 0 0 0 0 180
Ralph Coffman 2 9 0 0 0 0 0 0 135
144 123 73 12 12 12 12 17
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4 - Backlog comparison (Part I and Part II)

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Total
RIG 2448 2517 1723 1440 1210 975 770 770 770 770 516 387 14296
NE 1669 1500 935 682 639 491 298 112 0 0 0 0 6326
ESV 1999 1801 823 461 0 0 0 0 0 0 0 0 5084
SDRL 1895 1770 780 368 85 0 0 0 0 0 0 0 4898
DO 1155 1508 1175 892 59 0 0 0 0 0 0 0 4879
RDC 1393 1150 356 61 61 61 61 87 0 0 0 0 3230
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Commentary and analysis:

SDRL, DO and RDC present also an excellent technical profile; however, they are fundamentally different when we look at the rig fleet composition.

SDRL owns a very modern fleet at a cost of a huge long-term debt. The company has many rigs under construction, as we speak, without a firm contract, which is worrisome.

In a normal situation, owning a modern fleet should be a competitive advantage; however, we are experiencing an atypical business situation and owning brand new rigs is not helping. The contract backlog has been rapidly shrinking after 2017 and the situation may become difficult if the tendering activity does not improve in 2017.

Also, SDRL suffered an important setback in September 2015, with the loss of the Husky contract for the newbuild semi-sub West Mira, due to delays in the rig delivery; that cost the company a 5-year contract worth $1.18 billion (click to read my preceding article about the issue).

DO has been much more prudent in its expansion approach, thereby managing a very low debt which could become an important survival advantage.

Its overall fleet is quite old, but the company was able to add a new fleet of four UDW drillships, which will positively impact the company's backlog well into 2018.

However, I would like to see the company accelerate its rig attrition by getting rid of a significant part of its older rigs, while taking advantage of the market and replace its fleet with newer rigs acquired at a distressed price level.

Finally, we have RDC, which seems to be the best managed of the entire offshore drillers, in my opinion. Rowan had a very strong jackup fleet and was able to enter the Ultra Deepwater business with four drillships contracted on a two-year contract with an impressive day rate.

This is exactly where we may find some weakness. RDC will have its entire UDW fleet off contract by the end of 2017 or early 2018, and it will be a challenge to be able to contract them all, even at a very low day rate.

Of course, as I said in my preceding article, what is shown here is only one side of the equation. A thorough analysis about their respective balance sheets (debt, capex, income...) is also paramount and should be done in correlation.

For Seadrill, it is also important to consider the significant financial effect due to its relationship with billionaire M. John Frederiksen before concluding anything drastic. The recent positive move in stock price is a small reminder of how difficult it is to predict with accuracy what SDRL will do. Oil prices will play an important role as well. The company is in the process of restructuring its debt as we speak.

There are plenty of articles focusing on the balance sheet aspect because it is basically much easier to present it with a few ratios, but it often offers a very narrow vision of what is important. In some instances, it can lead investors to a total erroneous conclusion.

I believe these three companies will also weather the downturn and should be accumulated slowly even if 2016 may be far from being a stellar year.

Disclosure: I am/we are long SDRL, RDC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.