Offshore Drilling: Jack-Ups Fundamentals March 2019 Edition

Includes: BDRLF, ESV, NE, RDC
by: Vladimir Zernov

We continue to look at offshore drilling fundamentals.

This time, we turn our attention to jack-ups.

There's a clear bifurcation between older and modern jack-ups, a situation that was long-awaited by those offshore drillers who bet on modern rigs.

In this article, we will discuss the fundamentals of the jack-up segment of the offshore drilling market. The situation in this market is worth monitoring for investors and traders in drillers with jack-up presence: Ensco (ESV), Noble Corp. (NE), Rowan (RDC), Seadrill, Borr Drilling (OTCPK:BDRLF). As usual, I used Bassoe Offshore database to get the data.

Currently, there are 562 jack-ups in the world: 301 are drilling, 118 are warm-stacked, 70 are cold-stacked, 70 are under construction, and 3 are undergoing repair/SPS. When I published my previous article on this topic on December 13, 2018, “Offshore Drilling At The End Of 2018: Jack-Ups”, there were 565 jack-ups in the world, with 301 drilling, 122 warm-stacked, 64 cold-stacked, 76 under construction, and 2 undergoing repair/SPS.

The multitude of newbuild jack-ups were originally ordered to replace older jack-ups, those built before 1990. However, many of them still exist, and in my opinion, divide the market into two big groups: the older jack-ups (built before 1990) and modern jack-ups (built after 1990). We’ll look at each group separately.

Older jack-ups

Here are the current numbers: there are 195 jack-ups built before 1990 - 106 of them are drilling, 35 are warm-stacked, and 54 are cold-stacked. Let’s compare them to the numbers seen in December 2018. Back then, there were 198 older jack-ups in existence, with 111 of them drilling, 40 warm-stacked, and 47 cold-stacked. As expected, the number of older jack-ups continued to decrease. This is a natural process, but it goes slow. Only three jack-ups have been sold to scrap since my last update on jack-up fundamentals: Sagadrill 2, Noble Gene House, and Al-Doha. I believe that the scrapping process will continue, and that cold-stacked older jack-ups have no chance to return to the market. Warm-stacked jack-ups are also under serious question.

Modern jack-ups

At this time, there are 367 modern jack-ups in the world. Out of this number, 195 are drilling, 83 are warm-stacked, 16 are cold-stacked, 70 are under construction, and 3 are under repair/SPS. In comparison with the December 2018 figures, the total number of modern jack-ups did not change (hardly a surprise). However, the number of drilling jack-ups increased from 190 to 195, while the number of newbuild jack-ups under construction decreased from 70 to 76 - an accomplishment led by Borr Drilling, which has an interesting value proposition at current levels. Among cold-stacked modern jack-ups, the most notable rigs belong to Ensco, which has 5 modern jack-ups (Ensco 105, 111, 112, 113, 114) cold-stacked, mostly as a result of a dubious (in your author’s opinion) acquisition of Atwood Oceanics.

As modern jack-ups get more popular and older jack-ups prepare to leave the scene, dayrates also change. As per Bassoe, dayrates for premium harsh-environment jack-ups increased from $90,000 in December 2018 to $95,000 in March 2019. Premium benign environment jack-up dayrates remained roughly flat, while dayrates for vintage benign environment jack-ups dropped from $63,000 in December 2018 to $51,000 now.

Looking at the jack-ups segment as a whole, utilization slowly increases as older jack-ups leave the scene. However, the bifurcation between top, modern rigs and older jack-ups is increasingly visible. Drillers with top jack-ups fleets are already fully or almost fully booked, like Noble Corp. or Rowan, which will soon merge with Ensco. I expect that dayrates for top rigs will continue to rise, with the main near-term beneficiary being Borr Drilling, which has both a number of modern warm-stacked rigs as well as newbuilds in the yards.

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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.