22 Offshore Drillers For A Comprehensive Backlog Analysis As Of November 15, 2016

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Includes: ATW, AWLCF, DO, ESV, HEROQ, NADL, NE, ORIG, PACD, PGNPQ, RDC, RIG, SDLP
by: Fun Trading

Summary

The offshore drilling Industry is a very large service industry, with a "still" impressive backlog despite the slowdown, which is probably well above $85 billion worldwide and stretching well over.

Comparing my data from April 16, 2016 to November 15, 2016, which is merely a duration of 7 months, I calculated that the drop in backlog was a whopping 26.8%.

It seems evident that we have reached the bottom of this down cycle.

Source: The Semisubmersible Maersk Developer.

Introduction:

Drilling for oil and natural gas Worldwide is an important business worldwide despite a terrible slowdown due to the recent oil crash.

The Offshore drilling is a type of oil extraction in which wellbores are drilled through the seabed, either by shallow water drilling (25m-150m of water depth) or deep water drilling (500m-3,650m of water depth). The total drilling depth depends on the location of the reservoirs and the type of drilling facilities being used.

Different types of drilling rigs used for offshore drilling are jackup rigs, barges, platform rigs, submersible rigs, semi-submersible rigs, and drillships.

However, the most common types are the Jackups and the floaters, which comprised the semi-submersibles and the drillships.

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Exploration and Production Companies (like BP (NYSE:BP), Chevron (NYSE:CVX) or Statoil (NYSE:STO) and National oil companies ("NOC") such as ONGC or Pretrobras (NYSE:PBR) usually contract specialised drilling companies such as Transocean (NYSE:RIG) or Seadrill (NYSE:SDRL) to drill offshore wells.

To show the size of the investment involved Worldwide by E & P companies, I have studied a large sample of Offshore companies that are mostly trading in the NYSE or NASDAQ exchange in the USA.

I decided to compare thecontract backlog of 22 public and private companies:

Offshore Driller (11/15/2016) Ticker Exchange 3Q16 Y (x4/3Q) Backlog Floaters Jack-up other
Transocean Ltd. RIG NYSE 903 3,612 12 110 11 870 240 0
Noble Corp. Plc. NE NYSE 385 1,540 4 562 3 435 1 127 0
Songa Offshore SONG OSLO 229 916 4 490 4 490 0 0
Diamond Offshore Inc DO NYSE 349 1,396 3 975 3 945 30 0
Maersk Drilling ("1") Private Private 733 2,932 3 928 1 666 2 262 0
Ensco Plc. ESV NYSE 548 2,192 3 702 2 301 1 084 317
Seadrill Ltd. SDRL NYSE 650 2,600 3 093 2 426 630 37
China Oilfield Services - Drilling ("3") SHA HongKong SE 264 1,056 2 900~ 1 800 1 100 0
Seadrill Partners LLC SDLP NYSE 350 1,400 2 390 2 172 0 218
Ocean Rig UDW Inc. ORIG Nasdaq 420 1,680 1 915 1 915 0 0
Rowan Companies Plc. RDC NYSE 379 1,516 1 841 1 378 463 0
Odfjell Drilling ODL OSLO 175 700 1 565 1 565 0 0
Saipem SpA (Drilling offshore) [ENI] SPM Italy SE 350 1,400 1 128 752 376 0
Pacific Drilling S.A PACD NYSE 182 730 710 710 0 0
Atwood Oceanics Inc. ATW NYSE 189 755 701 701 0 0
North Atlantic Drilling Ltd. NADL NYSE 145 580 359 14 345 0
Fred Olsen Energy ASA FOE OSLO 214 856 330 330 0 0
Paragon Offshore Plc. OTCPK:PGNPQ OTC BB 125 500 330 0 330 0
Stena Drilling Private Private 180 720 303 303 0 0
Vantage Drilling International ("2") Private Private 40 160 261 203 58 0
AWILCO Drilling Plc. OTCPK:AWLCF OTC 36 143 179 179 0 0
Hercules Offshore Inc. OTCPK:HEROQ OTC BB 12 48 157 0 97 60
TOTAL 27 431 50 929 42 155 8 142 632
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("1") Maersk Drilling is a subsidiary of A.P. Möller-Maersk A/S (The Maersk Group)

("2") Vantage Drilling International is a private company after Vantage Drilling Co. went bankrupt.

("3") China Oilfield Services Ltd. - COSL.

As of the end of June 2015, the Group operated and managed a total of 44 drilling rigs (including 33 jack-up drilling rigs and 11 semi-submersible drilling rigs). 19 of those were operating in the China Sea, and 10 were operating in international regions such as the North Sea of Norway, Mexico and Indonesia, 14 rigs were on standby, and 1 was under repair and maintenance. In addition, the Group also owned 2 accommodation rigs and 5 module rigs. COSL drilling Europe AS has 8 Jackups and 4 Semi-Submersibles.

Note: The backlog for the company's drilling segment has been estimated from $1.5 billion revenue in 2015 (I was not able to find out about the offshore drilling backlog from the company filings. Attempt to contact the company was unsuccessful.)

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Commentary:

The offshore drilling Industry is a very large service industry, with a "still" impressive backlog despite the slowdown, which is probably well above $85 billion worldwide and stretching well over 2022.

In fact, the real dollar amount is nearly impossible to guess-estimate without spending a tremendous amount of time, resources and effort that I do not have. The chart above indicates $59.9 billion and represents only 22 companies.

I could have incorporated another dozen more, such as Aban Offshore (15 Jack-ups and 2 Floaters) or Shelf Drilling (34 Jack-ups fleet).

Nearly 83% of this backlog represents the floaters segment (Drillships and Semisubmersibles), and 16% represents the Jack-up segment. The Jack-up segment will always be smaller in terms of dollar, compared to the Floaters segment, for obvious reasons. Deepwater and Ultra-deepwater necessitate longer contracts and larger CapEx.

These 22 companies have an estimated annual revenue of $27.4 billion.

According to Wood Mackenzie global upstream development spending from 2015 to 2020 has declined 22%, or $740 billion, since fourth-quarter 2014.

In fact, global upstream capex is expected to fall below $400 billion, this year, for the first time since 2009, which represents a 42% drop from its record high in 2014. This is the largest decline in history, and shows the real face of this terrible bear cycle, in which the offshore drilling has been struggling for these past several years.

The past two-three years have been clearly dismal for the industry. Accordingly, I am not surprised at all, that the contract backlog has been shrinking like an ice cube under the scorching summer sun.

In fact, comparing my data from April 16, 2016 to November 15, 2016, which is merely a duration of 7 months, I calculated that the drop in backlog was a whopping 26.8%, based on the 16 most reliable companie backlogs indicated above. Transocean shrunk by $2.2 billion, NE by $1.8 billion... Look for yourself.

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The reason is essentially the lack of tendering, coupled with a high rate of early terminations, especially in the floater segment. As an example, Transocean recently indicated that one of its drillships, The discoverer India, was terminated earlier by Reliance Industries Ltd.

Transocean will be compensated by Reliance and its partners for the early termination through a lump-sum payment of approximately $160 million.

The only problem and it is not negligeable, is that I calculated the period between December 2016 to January 2021 at about 1,470 days, which means a total backlog loss of $747 million. This is $587 million that have vanished from the RIG backlog.

And I could go on and on.

Now, what can we say about the near future?

Evercore ISI's Oil Services, Equipment & Drilling Fundamental Research, said it clearly a few months earlier:

We continue to believe current spending levels, as well as oil prices are unsustainable, and the longer spending remains subdued, the stronger and longer the coming upcycle will be

Interestingly, a survey has been conducted by the company among oil players:

Around 28% of survey respondents plan on increasing 2H 2016 activity by more than 10%, "a number that could expand significantly if oil prices continue to move higher," the report noted. About 66% would increase 2016 capex by more than 10% at $50-$55/bbl WTI, while about 24% would increase capex greater than 15% if WTI eclipsed $55/bbl.

However, "by far most importantly, when asked about spending intentions for 2017, 73% of companies [participating in the survey] plan to increase spending while 27% plan to keep spending flat. No companies are planning further reductions."

It seems evident that we have reached the bottom of this down cycle. My thinking is also supported by the price of oil, that have shown a timid come back and established a strong support in the $45's now. It is not sufficient and far from the "sweet spot" at $55-$60 a barrel but it is a progress nonetheless.

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Many CEOs in the offshore industry have also indicated that they are now more optimistic for 2017. M. Jeremy Thigpen, RIG CEO:

In the near term, based on current commodity prices and market conditions, we expect to see an increase in both interest and contracting activity as we move through 2017, with a stronger recovery forecasted in 2018.

Here, A more cautious tone from M. Thomas Peter Burke, RDC CEO.

Although premature to forecast a definitive rebound in the market, we are certainly encouraged by the positive recent upward direction of crude oil prices. This year marks the first time since the beginning of the downturn that commodity prices seem to be supported during our customers' budget cycles.

However, 2017 still looks to be a conservative investment year for our customers, with many of the contract awards focused on projects near existing infrastructure. As approximately 2/3 of offshore production worldwide comes from shallow water, we hope that this bodes well for our high-specification Jack-up fleet.

They are at the battle forefront, and if they are a little bit more optimistic now, it is a good sign.

The next difficult point is about the rig oversupply and its negative effect on the day rates.

The offshore industry is flooded by an astonishing amount of rigs (floaters and jack-ups) that are cold stacked and "waiting" for a new assignment "later".
This situation has already put an extra pressure on day rates, which are now basically at the rock bottom or breakeven level.
As an example, day rate in Offshore UK North Sea has plummeted from $375k/d in early 2014 to now barely above $100k/d. They are below the day rates of 2000-2004 if we apply inflation.

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To invert this trend as quickly as possible the offshore industry will have to be more pro-active in the retirement segment, and accelerate rig attrition by two folds. Transocean and Ensco have been the clear leaders so far.

Conclusion:

It is not sunny out there yet. We are experiencing the aftermaths of a hurricane force 5 that has gone away recently. However, it is behind us and the long and slow recovery may now be starting safely.
Oil prices are still paramount for a meaningful recovery, and a more adequate tendering next year.
However, the offshore industry will have to deal with a rig oversupply that is crippling it from a sustainable financial recovery. The sooner the better.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: I own and trade stocks in the offshore drilling sector.

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