There have been a few new contracts signed in recent weeks that show how the market continues to strengthen for the owners of offshore drilling rigs. This article will take a look at three such contracts. Two of these contracts were awarded to Ocean Rig (ORIG) for the use of two of its ultra-deepwater units. The third contract was for a jack-up rig and it was awarded to SeaDrill (SDRL).
The Eirik Raude is a 2002-built semi-submersible offshore drilling rig that is owned and managed by Ocean Rig UDW Inc. The rig has a rated water depth of 10,000 ft. and a maximum drilling depth of 30,000 ft. This is certainly a capable rig although there are other semi-submersibles in existence with a greater maximum drilling depth. This is important because, generally, the more capable the rig the higher the potential dayrate that it can command.
On March 22, 2012, Ocean Rig announced that it has contracted out the Eirik Raude for an 84-day assignment off of the coast of West Africa. The total backlog for this assignment is $67.5 million which works out to a dayrate of $803,500 per day. Unfortunately, Ocean Rig did not specify whether or not that figure includes the mobilization fee or even how much the fee is. Regardless, this does provide further evidence that dayrates for ultra-deepwater rigs are continuing to increase. Prior to this announcement, the highest dayrate awarded to any rig owner was the $650,000 that was paid for Transocean's (RIG) Deepwater Expedition.
Ocean Rig Olympia
The Ocean Rig Olympia is a 2011-built drillship that is, of course, owned and managed by Ocean Rig UDW Inc. The rig has a rated water depth of 10,000 ft. and a maximum drilling depth of 35,000 ft. This is certainly a capable and advanced offshore drilling rig but even so, it is not as capable as some competitors' rigs such as Pacific Drilling's (PACD) drillships. Their drillships typically have a maximum drilling depth of up to 40,000 feet.
On April 9, Ocean Rig announced that it has contracted out the Ocean Rig Olympia for a three-year assignment off of the coast of West Africa. The total backlog for this assignment is $652 million which works out to a dayrate of approximately $595,400 per day. As with the previous contract announcement, Ocean Rig did not specify whether or not that figure includes the mobilization fee or even how much that fee is. That is, however, still one of the highest dayrates that has awarded during the current cycle.
Ocean Rig also made another statement during their announcement of this contract that supports my position that the industry could be looking at a shortage of rigs over the next few years. Ocean Rig stated that with this new contract, the company no longer has any rigs available for contracts in 2012. Customers are currently hustling to contract out the rigs that are required given the pipeline of offshore projects. Demand is much greater than supply at the moment and Ocean Rig's statement provides further evidence of this.
The West Callisto is a 2010-built high specification independent leg cantilever jack-up offshore drilling rig that is owned and managed by SeaDrill Ltd. The rig has a rated water depth of 400 ft. and a maximum drilling depth of 30,000 ft. This makes the West Callisto one of the most capable jack-up rigs in the world today.
On March 12, SeaDrill announced that it has entered into a three year contract for the use of this rig off the coast of Saudi Arabia. The contract promises to deliver $164 million over the three-year period plus a $20 million mobilization fee. This works out to a dayrate of approximately $149,750. This is quite a respectable dayrate and ensures that SeaDrill will continue to generate cash flow from the rig after the current contract expires in August 2012.
The average contract length for a jack-up rig is approximately 8 months. Thus, a three-year contract is well above average, although SeaDrill has gotten such contracts before. This could be a sign that the jack-up market is beginning to face a supply shortage which is causing dayrates to climb. SeaDrill stated in their most recent earnings press release that dayrates for jack-ups are not increasing significantly however the company is seeing the contract length being extended. The company clarified that statement in their more recent presentation at the Howard Weil 40th Energy Conference. In their presentation at that event, the company stated that dayrates for jack-ups are increasing but only slightly. The company reiterated that the most significant improvement in the jack-up market has been the increasing contract length. This contract supports that statement. The dayrate is slightly above average but the length is significantly longer.
This chart shows the average dayrates for all floater and jack-up rigs worldwide. These two types would include every rig that has been discussed in this article.
As the chart above shows, both of Ocean Rig's new contracts have dayrates that are above average for the respective type of rig. SeaDrill's contractual dayrate is barely above the $148,000 average for that type of rig. SeaDrill's West Callisto contract shows a strengthening market with its length, not its dayrate.