8 Offshore Drillers With Exposure To Petrobras' Financial Struggle

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Includes: DO, ESV, NE, ORIG, PGNPQ, RIG, SDRL, VTG
by: Fun Trading

Summary

Petrobras has a significant impact on the health of the offshore rig market. It is one of the largest operators of offshore rigs.

Eight known offshore drillers are contracting 27 floaters (Drillship or Semi-submersible) to Petrobras which is very significant.

Analysts recommend avoiding offshore driller stocks with significant exposure to the Brazilian state-backed oil company.

On June 12, Barron's author Mr. Ben Levinshon published an article untitled "Diamond offshore, Ensco and the Petrobras time bomb).

Cowen's J.B. Lowe and Roland Morris observe that Petrobras (NYSE:PBR) will soon be releasing its strategic business plan-and worry that Paragon Offshore, Diamond Offshore Drilling and Ensco could be at risk, while Noble's exposure looks manageable.

"As one of the largest operators of offshore rigs, Petrobras has a significant impact on the health of the offshore rig market. The company has been slashing rig activity since mid-2013 (going from 70 operated rigs to 50 currently), including the unilateral cancellation of contracts on five floaters leased from Brazilian drilling contractor Schahin just last month.

... with our expectation for global rig activity, which we expect will bottom out in late 2016 before rebounding in 2017…

We continue to recommend investors avoid offshore driller stocks with significant exposure to the Brazilian state-backed oil company. As demonstrated through the cancellation of the Schahin contracts, Petrobras is still aggressively cutting rigs wherever it can. With ~25%, ~20% and 15% of their respective backlogs tied to Petrobras, we believe Paragon Offshore, Diamond Offshore Drilling and Ensco are among the most at risk for further Petrobras activity reduction through 2017. We prefer shares of Noble, with less than 5% of its backlog tied to Petrobras."

Commentary:

The article above is referring to a "cancellation of contracts on five floaters leased from Brazilian drilling contractor Schahin". I think there is a fundamental misunderstanding that should be corrected here.

On May 28, Petrobras canceled five offshore ship leases from Schahin Petroleo e gas SA.

Brazil's state-run oil company Petrobras canceled leases with Schahin Petroleo e Gas SA for five offshore oil drilling and production vessels after a cash crunch forced the ship leaser to remove the equipment from service for nearly a month, Schahin said on Thursday.

The decision, if upheld, will result in the loss of more than 1,000 related jobs, Schahin said, while creditors and investors stand to lose more than $4 billion. Schahin said it plans to sue Petrobras...

What happened is that Petrobras cancelled the Schahin's contract after the company became insolvent thereby breaching the contract by retiring the vessels from work for a month. Probably a safe move considering that the rigs were claimed by the banks.

Schahin said it was forced in early April to temporarily pull these vessels from service with Petrobras for nearly a month and move them to port after a lack of cash to pay debt led a creditor to seek the sale of assets. The creditor was leasing the Pantanal and Amazônia to Schahin.

I am not sure if it was the perfect example to illustrate the struggle in which Petrobras has been ensnared? However, it is a fact that Petrobras is still struggling financially and investors will have to be careful.

What really is the situation?

According to Rigzone data, Petrobras operates 59 rigs (Tender, Platform, Jackup, Drillship and Semi-sub) owned by 15 different offshore drillers including Petrobras itself. Only 50 rigs are classified as drillship or semi-submersible.

In fact, only eight offshore drillers are involved with Petrobras, and can be traded in the USA market:

  1. Diamond offshore (NYSE:DO)
  2. Ensco Plc. (NYSE:ESV)
  3. Noble drilling (NYSE:NE)
  4. Ocean Rig (NASDAQ:ORIG)
  5. Paragon Offshore (PGN)
  6. Seadrill Ltd. (NYSE:SDRL)
  7. Transocean Ltd. (NYSE:RIG)
  8. Vantage Drilling (NYSEMKT:VTG)
Company Total Platform Tender Jackup Drillship Semi-sub
Atlantica Tender drilling Ltd 1 0 1 0 0 0
1 Diamond Offshore 4 0 0 0 1 3
2 Ensco Plc. 5 0 0 0 1 4
Etesco Drilling SVCS 2 0 0 0 2 0
3 Noble Drilling 1 0 0 0 0 1
4 Ocean Rig UDW 2 0 0 0 2 0
Odebrecht Oil & Gas 7 0 0 0 4 3
5 Paragon Offshore 3 0 0 0 2 1
Petrobras NOC 12 6 0 2 0 4
Petroserv SA 2 0 0 0 1 1
Queiroz Galvao Oleo e Gas SA 7 0 0 0 2 5
Schahin Petroleo e gas SA 1 0 0 0 1 0
6 Seadrill Ltd. 6 0 0 0 2* 4
7 Transocean Ltd. 5 0 0 0 3 2
8 Vantage Drilling 1 0 0 0 1 0
TOTAL 59 6 1 2 21 28

* I added the West Carina

Rig status related to the eight Offshore drillers:

Offshore Driller Rig name Year built Rig End of contract

Day rate

in $k

Diamond Offshore Ocean Clipper 1997 Semi-sub 12/15 312.63
Ocean Courage 2009 Semi-sub

10/15

10/15 - 2/18

567

455

Ocean Valor 2009 Semi-sub

10/15

10/15-10/18

440

455

Ocean Alliance 1988 Drillship 6/16 367.09
Ensco Ensco 6001 2000 Semi-sub 6/18 362
Ensco 6002 2001 Semi-sub 7/18 362
Ensco 6003 2004 Semi-sub 1/17 315
Ensco 6004 2004 Semi-sub 10/16 315
Ensco DS-5 2011 Drillship 7/16 435
Noble Noble Dave Beard 1986/2008 Semi-sub 4/16 235
Ocean Rig UDW Ocean Rig Mykonos 2011 Drillship 1Q18 443.8
Ocean Rig Corcovado 2011 Drillship 2Q18 450.1
Paragon Offshore DPDS2 1981/2002/2011 Drillship 3/17 300
DPDS3 1977/2005/2013 Drillship 8/17 347
MSS2 1977/2004 Semi-Sub 4/16 270
Seadrill Sevan Driller 2009 Semi-Sub 6/16 419
West Orion 2010 Semi-Sub 7/16 602
Sevan Brasil 2012 Semi-Sub 7/18 391
West Tellus 2013 Drillship 4/18 473
West Eminence 2009 Semi-Sub 7/15 602
West Carina 2015 Drillship 6/18 463
Transocean Sedco 706 1976/1994/2008 Semi-Sub 9/16 282
Transocean Driller 1991 Semi-Sub 7/16 256
Dhirubhai DW KG1 2009 Drillship 12/17 408
Petrobras 10000 2009 Drillship 8/19 421
Deepwater Navigator 2000 Drillship 2/16 361
Vantage Drilling Titanium Explorer 2012 Drillship 1/20 585

Conclusion:

Petrobras is obviously very influential in the offshore drilling industry, and it is of a paramount importance to follow closely the progress in its effort to overcome this financial storm.

PBR has been struggling with corruption and mismanagement for years, and the company was recently close to filing bankruptcy with a total debt of a whopping $170 billion. To add insult to injury, the price of oil crashed from the high $110's to as low as $45, and is now finally bottoming around $65.

Petrobras terminated a few contracts in order to reduce spending, and Seadrill with the West Taurus and the West Eminence or Diamond Offshore with The Ocean Baroness come to mind.

I agree with the analysts above that Petrobras is still a risk for some offshore drillers such as Paragon offshore, diamond offshore and a few others, because of the contract backlog issue. However, I do not agree with them when they indicate:

"As demonstrated through the cancellation of the Schahin contracts, Petrobras is still aggressively cutting rigs wherever it can."

This contract termination is very specific in nature, and cannot be used to support the idea that Petrobras is still "aggressively" cutting rigs. In fact, after the last $2.5 billion bond offering and the huge $16.7 billion in impairment charge in April, the company is now slowly improving, and we can imagine some sort of rebound the second part of 2016.

Disclosure: The author is long RIG, ESV, SDRL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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