Is The Maersk Drilling Contract A Breakthrough For The Semi-Sub Segment?

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Includes: BP, DO, E, ESV, NE, RDC, RIG, SDRL
by: Vladimir Zernov
Summary

Maersk Drilling reports a long-term contract in Australia.

The dayrate calculates to roughly $270,000, way above recent fixtures.

I discuss this contract and its implications for the semi-sub segment, as well as for offshore drillers with benign environment semi-subs in their fleet.

Maersk Drilling, which is set to start trading on Nasdaq Copenhagen after demerger from A.P. Moller-Maersk (OTCPK:AMKAF), surprised the market with a new contract announcement - the company’s semi-sub Maersk Deliverer got a three-year contract from Inpex in Australia with an estimated contract value of $300 million, including mobilization.

The resulting dayrate calculates to roughly $270,000, way above current rates for semi-subs. The contract has two one-year options and is expected to begin in the second quarter of 2020. A logical question is whether this is a one-time item or a start of improvements for benign-environment semi-subs, which have been under material pressure in recent years.

Maersk Deliverer

Maersk Deliverer is one of the four semi-subs of Maersk Drilling. The rig is on contract with Eni (E) in Timor Leste until April 2019. Bassoe Offshore estimated that the dayrate on the Eni job was $140,000. Maersk Deliverer has two sister ships, Maersk Developer and Maersk Discoverer. Maersk Developer is on contract with Caim in Mexico from September 2019 to December 2019 with four one-well options. That contract was estimated to have a dayrate of $150,000. Maersk Discoverer is nearing the end of a long-term job for BP plc (BP).

In short, it is clear that Maersk Deliverer got a very material raise from both its own previous contract and the contract of a comparable sister ship. However, the jobs are very different. The Eni job is a pure spot work: March 2019-April 2019 with a one option well. Maersk Developer work is the same: September 2019-December 2019 with four one-well options. There’s no surprise that spot, short-term work got spot rates.

In Maersk Deliverer’s case with the new contract in Australia, we are talking about a long-term commitment for three years. It is natural that such commitments will demand a material premium as the market prepares for the rebound in offshore drilling, especially given the fact that spot rates balance somewhere around opex-neutral, depending on the region.

As per Bassoe Offshore, Maersk Deliverer is in the top tier of benign-environment rigs, judging by its estimated market value, ranking 11 out of 77 rigs in existence (note that Bassoe does not provide values for newbuilds until they are delivered):

Source: Bassoe Offshore

In my opinion, the new contract suggests that higher-tier semi-subs on long-term contracts will receive a material premium above current spot rates (which are horrific and unsustainable). This is a good sign for the market, although I wouldn’t count on immediate major improvements for the spot rates. Hopefully, somewhere in the second half of this year, we’ll see more longer-term fixtures for 2020 and beyond.

The benign semi-sub market is important for Ensco (ESV) (and for Rowan (RDC) after their merger), Noble Corp. (NE), Transocean (RIG) and, especially, Seadrill (SDRL), which has a bunch of cold-stacked semi-subs. Diamond Offshore (DO) is certainly watching activity in Australia, as it has Ocean Monarch working there. In general, I think it’s too early to believe that the benign semi-sub segment is heading for material improvements, although the Maersk contract is a welcome change from what we have seen so far.

Out of the above-mentioned companies, Seadrill is at the biggest risk in this segment, as its collection of cold-stacked semi-subs has real chances to ultimately visit the scrapyard. On the positive side, Ensco will likely benefit most of all in case of upside in this market, since its cold-stacked rigs are of the same design as some of its working rigs and could be unstacked when market conditions permit.

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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.

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