Offshore Drilling: Semi-Sub Fundamentals March 2019 Edition

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Includes: AWLCF, DO, ESV, NE, PBR, RIG, SDLP, SDRL
by: Vladimir Zernov
Summary

We continue discussing the fundamentals of the offshore drilling industry and turn to semi-subs.

The situation remains very challenging outside the robust modern harsh-environment semi-sub market.

I discuss rig supply and day rate dynamics, as well as companies that should be monitored closely.

We continue the discussion started in “Offshore Drilling: Drillships fundamentals March 2019 Edition.” In this article, we turn our attention to the semi-sub segment of the offshore drilling market which should be closely monitored by traders and investors in companies that have semi-subs – Diamond Offshore (DO), Ensco (ESV), Noble Corp. (NE), Transocean (RIG), Seadrill (SDRL), Seadrill Partners (SDLP), Awilco (OTCPK:AWLCF). Just like in all my previous articles on offshore drilling fundamentals, I’ll be using data from Bassoe Offshore database. I will also compare the current data with the data presented in my article “Offshore Drilling At The End Of 2018: Semi-Subs” which was published on December 13, 2018.

Currently, there are 142 semi-subs in the world: 60 are drilling, 34 are warm-stacked, 35 are cold-stacked, 10 are under construction and 3 are undergoing repair/SPS. Three months ago, there were 143 semi-subs, with 55 drilling, 44 warm-stacked, 34 cold-stacked and zero under repair/SPS.

The semi-sub segment consists of two large segments – benign environment semi-subs and harsh-environment semi-subs. These segments have different dynamics, and we’ll discuss them one by one.

Benign environment

There are 77 benign-environment semi-subs in the world: 34 are working, 19 are warm-stacked, 17 are cold-stacked, 5 are under construction, and 2 are undergoing repair/SPS. According to Bassoe Offshore estimates, current day rates are $145,000 for 6th gen semi-subs and $120,000 for vintage semi-subs. These day rates are flat compared to December 2018 numbers.

The main problem in this segment is that contracts are scarce while there are many rigs waiting on the sidelines. In these circumstances, cold-stacked rigs appear to be in danger. Let’s take a closer look at them:

Source: Bassoe Offshore

The majority of cold-stacked semi-subs are modern rigs so they will not be scrapped any time soon regardless of the contract perspectives because of the accounting consequences of such moves. Out of the biggest players, Seadrill (with Seadrill Partners) has the biggest exposure which includes Sevan Brazil, Sevan Driller, West Orion, West Sirius and West Taurus.

While Seadrill puts on a brave face and states that it wants to wait for higher day rates, the problem with its semi-sub segment is real. Current benign environment semi-sub day rates are nowhere close to the rates that will justify the reactivation of the cold-stacked rigs; so they can be stacked for a number of years to come with the corresponding increase in their reactivation costs. Ensco also has big exposure with four rigs (8500, 8501, 8502, 8506) but the company has been successful with finding jobs for 8503, 8504 and 8505, so its cold-stacked rigs might have a future.

Source: Bassoe Offshore

Among newbuilds, Sete’s Frade and Urca will find their way back to the market as they have already received contracts from Petrobras (PBR) and are now waiting for a new owner who will manage them. Other three rigs – Bluewhale II, CMHI-182 and Sevan Developer, are under question.

Currently, the situation looks bleak for the benign-environment segment. Only a material increase in awarded jobs may move the needle here. In my opinion, Seadrill’s semi-subs have a real risk of not returning to the market despite the fact that they are modern rigs.

Harsh environment

According to Bassoe Offshore database, there are 65 harsh environment rigs in the world: 26 are drilling, 15 are warm-stacked, 18 are cold-stacked, 5 are under construction and 1 is under repair/SPS. Day rates are estimated to be $300,000 for 6th gen harsh-environment semi-subs and $150,000 for vintage harsh-environment semi-subs. I’d note that the day rate estimate for vintage harsh-environment semi-subs has dropped from $170,000 in December 2018. Oil companies are increasingly demanding new rigs, a trend highlighted by Awilco’s recent decision to order the second newbuild rig.

Source: Bassoe Offshore

The majority of cold-stacked harsh-environment rigs are old, and the decreasing day rates for them don’t paint a good picture for reactivation. Dolphin’s financial problems will likely lead to scrapping of Bideford Dolphin, Borgland Dolphin, Bredford Dolphin and Byford Dolphin sometime in the near future.

Transocean has already announced the decision to scrap Eirik Raude due to high reactivation costs (company’s weakened financial position also played a role in this decision). Awilco is highly unlikely to spend a penny on the cold-stacked WilHunter when it must pay for two newbuilds.

Diamond Offshore is already reactivating two rigs, so fate of Ocean Guardian and Ocean America is under big question. Seadrill, Seadrill Partners are again the cold-stacking champions with West Alpha, West Eminence, West Leo, West Pegasus and West Venture. In my opinion, the cold-stacked rigs don’t present any danger to the market, so the upside for modern harsh-environment rigs should continue as highlighted by the recent fixture of Seadrill-managed West Bollsta.

Conclusion

The semi-sub segment of the offshore drilling market has one bright point – the modern harsh-environment semi-subs. Here, the most intriguing player is Awilco, which has just ordered a second newbuild rig and has options for 2 more rigs. The biggest loser from the semi-sub problems is Seadrill. The company’s cold-stacked rigs still carry plenty of asset value, and failure to unlock this value is a very serious long-term threat.

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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 may trade any of the above-mentioned stocks.