Seadrill Puts Drillships To Work
Summary
- Seadrill gets work for West Saturn from Statoil.
- This contract follows drillship awards for Noble Corp., Vantage Drilling and Ensco.
- Contract activity in the drillship space marks the beginning of the new trend.
- The trend is still fragile and could be hurt by additional downside in oil prices.
Seadrill (NYSE:SDRL) has just announced that Statoil (STO) awarded a contract to its rig West Saturn. Seadrill has a firm contract for one well and one drill stem test. The contract also includes a number of option wells. West Saturn is expected to begin working between December 2017 and January 2018. Seadrill stated that the backlog for the firm portion of the contract is $26 million.
While the numbers are small, the news is very significant. We are witnessing a pickup in drillship contract activity, despite the fact that both WTI and Brent continue to trade below $50 per barrel. First, Noble Corp. (NE) was able to secure short-term contracts for Noble Bob Douglas (the rate was undisclosed). Then, Vantage Drilling announced a contract for Platinum Explorer. Recently, Ensco (ESV) announced a contracts for its three drillships (DS-4, DS-7, and DS-10). This is not a coincidence, but a start of a new trend. Oil producers clearly have work they cannot delay any longer, so they've started employing drillships.
While Seadrill has made public the backlog for the firm portion of the contract, the dayrate is hard to derive as we do not know whether payment for mobilization and for upgrades (West Saturn will be upgraded with a managed pressure drilling system) were included in the backlog number. Previously, West Saturn worked for Ophir from April 2017 to May 2017 at a dayrate of $155,000. My expectation is that the dayrate for the firm portion of the contract should be about the same.
Among the above-mentioned contracts, only Vantage Drilling agreed to be paid significantly less than $150,000 per day. However, I must note that both Noble Corp. and Ensco did not disclose their dayrates, so exact numbers are anybody's guess. For Ensco, fellow contributor Fun Trading recently argued that dayrates could be north of $200,000. My expectations are lower (I provided my reasoning in this article). The same reasoning is true for Noble Corp.'s Bob Douglas contracts -- it's hard to imagine that the rig earned more than $200,000 per day. In fact, the figure is likely closer to $150,000.
Anyway, we can forget about dayrates for a while. They will surely be as low as possible due to low utilization of the rig fleet and low oil prices. Jobs will mostly be short term with options for potential work, which seems good for both parties -- oil producers do not commit to too much work amid uncertainty around the oil price outlook, while drillers do not commit their rigs at rock-bottom dayrates for too long.
Another trend that I see is that small drillers cannot get much work. Atwood Oceanics (ATW) shareholders should definitely applaud the company's management for the last-ditch effort to save the company through a merger with Ensco. It's hard to tell what specialized UDW drillers like Pacific Drilling (PACD) and Ocean Rig (ORIG) could do during the current crisis, even if they emerge mostly debt-free after restructurings. Oil producers seem to prefer bigger, established companies -- Seadrill is able to get work despite all the uncertainty regarding its ongoing restructuring process.
Speaking about Seadrill's restructuring, I expect no influence from the new contract award on the process. As I pointed out in my recent article on Seadrill Partners (SDLP), I hope to hear restructuring details by July 31. Judging by Seadrill's current market capitalization, the market expects that creditors will leave something for common shareholders on the table. In my view, the current market environment does not warrant this and I believe that creditors will try to leave only a minuscule part of Seadrill to current shareholders. In other words, I'm leaning toward an Ocean Rig-like scenario. The recent drillship contract awards are a "green shoot" for the industry, but they cannot be significant enough to change bankers' moods. Dayrates are surely low, so such contracts do not contribute anything significant to cash flow, which remains in the center of lenders' interests.
From a big picture point of view, another drillship contract award is positive for the industry as it marks the beginning of a new trend. Note that the trend could still be fragile and additional downside in oil prices might bring it to an end. For Seadrill shareholders, the main hope is the positive outcome of ongoing restructuring negotiations. Hope is hardly an investment thesis, so all investors who are new to the stock will be better off avoiding it until restructuring details are made public.
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Comments (33)
Has anyone noticed that we are bombarded with news about fraking surpassing the OPEC cuts and more wells are in operation? The Saudis are exporting more oil? In the meantime oil and gas inventories are dropping while demand is rising. Just in the last two weeks oil inventories have dropped 13 + million barrels. It just seems like the media is focused on doom and gloom while the pile of oil is dropping. The big question is going to be the threshold much like 2013 and 2014 when the market began to short oil. If the Saudis merely drop another 500,000 barrels the time may be ripe for oil stock, yet which ones will recover?
