Pacific Drilling (PACD) owns and operates one of the newest and most modern fleet of ultra-deepwater drillships in the world. The company had four ships in operation with two more under construction at the time of publication of its most recent fleet status report (PDF). Since that time, the company has exercised its option for the construction of a seventh ultra-deepwater drillship which will be delivered in 2014.
Click to enlarge
Source: Pacific Drilling.
All of these ships are capable of operating in up to 12,000 feet of water except for the Pacific Bora which is only capable of operating in up to 10,000 feet of water. All of these ships except for the Pacific Bora and the Pacific Mistral are capable of drilling at depths of up to 40,000 feet. The other two ships are capable of drilling at depths of up to 37,500 feet. These ships are thus well equipped to operate in some of the fastest growing offshore markets including the U.S. Gulf of Mexico, Brazil, the North Sea and the Angolan pre-salt. These high-specification ships also ensure that Pacific Drilling has the equipment to compete with anybody else in the ultra-deepwater space.
The average worldwide dayrate for a drillship capable of operating in more than 4000 feet of water was $462,000 as of March 20, 2012. Every operational ship in Pacific Drilling's fleet except for the Pacific Mistral carries a dayrate that is above this average. That speaks volumes for the quality of Pacific Drilling's fleet. Its dayrates are well below the current market dayrate for these ships.
Transocean's (RIG) Deepwater Expedition was awarded a contract with a $650,000 dayrate late last week. The Deepwater Expedition is older and less capable than any of the drillships in Pacific Drilling's fleet. Therefore, Pacific Drilling's rigs should each be able to command a dayrate of at least that high in the current market. The Pacific Scirocco is the only drillship that comes off of contract this year. Total (TOT) has the option to renew its contract for the drillship at that time with a higher dayrate. If Total chooses to exercise this option then the dayrate for this rig will increase and this will have a positive effect on Pacific Drilling's bottom line. If Total does not choose to exercise its option to extend the contract then it is still likely to have a positive impact on Pacific Drilling's top and bottom lines. This is because Pacific Drilling should have no difficulty re-contracting out this rig in the current market. The dayrate that the company would receive from the new customer in this case would almost certainly be higher than what it is receiving now.
The Pacific Khamsin and the Pacific Sharav offer great potential for Pacific Drilling to grow its revenues, cash flows and profits over the next few years. These two drillships will be delivered in 2013, with the Pacific Khamsin in April and the Pacific Sharav in September. Neither of these two rigs has been contracted out yet. If we assume that Pacific Drilling manages to achieve a $650,000 dayrate for each of them then that will increase the company's annualized revenues by approximately $470 million (as long as the company does not get too plagued with downtime).
Pacific Drilling's customers are some of the largest oil companies in the world. Two rigs, the Pacific Bora and the Pacific Santa Ana, are currently contracted out to Chevron (CVX). The Pacific Scirocco is currently contracted out to Total. The Pacific Mistral is contracted out to Petrobras (PBR). All three of these customers are financially solid so there is no need to worry about a customer being unable to fulfill their contractual commitments.
Pacific Drilling's drillships operate in three different countries which reduces its regime risk. The governmental actions following Macondo in the U.S. and Chevron's Frade field spill in Brazil have convinced me that international diversification is important in this industry in order to reduce exposure to the policies of any one government. Pacific Drilling has achieved that. The company has one drillship operating in Brazil, one drillship operating in the U.S. Gulf of Mexico, and two drillships operating in Nigeria.
Another effect that the Macondo had on the offshore drilling industry is to move customer preferences toward newer equipment with a greater focus on safety. Pacific Drilling delivers this with its state of the art fleet. The oldest rig in Pacific Drilling's fleet is the Pacific Bora which was delivered in 2010. The rest of the rigs were delivered in 2011 or later. Thus, Pacific Drilling is very well positioned to fulfill this customer demand. This should allow the company to collect dayrates in excess of what competitors receive for older rigs. This should stimulate growth for the company.
Pacific Drilling could be a good long position for an investor willing to take a chance on what is essentially a start-up drilling company. Management has significant experience in the offshore drilling industry, so this should help to mitigate some of the risk. Pacific Drilling will announce its 2011 results on March 26, 2012. Investors who are interested in the company may want to wait for these results before taking a position in the stock but even prior to them, it does have good potential with its modern fleet and the current trends in the industry.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PACD over the next 72 hours.