Rowan (NYSE:RDC) has just published its fleet status report, so now we have more fresh data on the state of the offshore drilling market. Previously, Ensco (NYSE:ESV) published its fleet status report, confirming the growing disparity between the jack-up and the UDW segment. In my view, the takeaway from Rowan's report is the same.
Rowan should be the natural winner from the rebound in jack-up market as the company operates just 4 drillships and the remaining rigs are jack-ups. The reality is, of course, a bit more complicated than theory.
Let's start with the drillship segment.
Only Rowan Resolute, which works for Anadarko (NYSE:APC), got good news as its contract was extended up to September 2018. The blend-and-extend contract is solidly positive for Rowan, which is not a given if we look at similar deals that were sealed this year.
In my view, Rowan will likely spend most of 2017 with 3 out of 4 drillships idle. Unfortunately, Anadarko's activity is a rare bright spot for the drillship demand. UDW work remains scarce and the company will have to rely on its jack-up segment.
On the jack-up front, jobs start to appear but day rates are weak.
This was the case in Ensco's report and the same is true for Rowan.
Gorilla VII got 60-200 days work at an undisclosed rate below $100,000. Previously, the rig was on the standby rate of $153,000.
Gorilla VI was terminated for convenience and will be on a standby rate of $250,000 from December 2016 to March 2018. The previous day rate was $362,000.
Gorilla V got an 8-month extension from TOTAL (NYSE:TOT) - once again, at a rate below $100,000 compared to the previous $175,000. North Sea rates are falling below $100,000 which is as low as they can theoretically get.
Both Rowan's and Ensco's fleet status reports show that the work that is available for jack-ups comes at the lowest possible rates. In my view, jack-up rates have reached their bottom as there's just nowhere to fall, especially given the fact that jack-up stacking expenses are relatively low.
Oil at $50 per barrel clearly creates some tailwinds for the jack-up segment of the market, but it does not translate into immediate benefits for drillers due to low rates.
However, market rebound has to start somewhere and it's naïve to assume that both the number of jobs and day rates will rebound simultaneously. I remain convinced that the market has to work through the backlog of readily available rigs before day rates have any chance for rebound.
Anyway, Rowan remains one of the leaders in the drilling segment. Exposure to the jack-up segment will allow the company to weather the storm, while the 4 drillships remain an option on future market recovery.
Rowan has been the most stable offshore drilling stock this year and will likely remain one of the best performers, unless oil rallies to $60 and more speculative stocks catch a bid.
Fundamentally, Rowan's fleet status report highlights current challenges. New UDW work is almost non-existent while jack-ups get rock-bottom day rates.
It's easy to get excited with the latest moves in oil and various verbal interventions from oil countries' officials, but offshore drillers need a more stable price environment to start getting more contracts.
I continue to highlight the importance of a healthy balance sheet in this market situation. I'm cautiously optimistic on Rowan, although I do not share the view that oil price rebound will be fast and easy after the OPEC deal.
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