Back at the end of June, we have discussed floater fundamentals - the numbers showed that the market was taking a pause after the upside seen in the beginning of this year. Recently, an interesting data point emerged - Petrobras (PBR) contracted Constellation's drillship Laguna Star for a long-term project in Brazil.
According to Brazil Energy Insight, Constellation demanded a dayrate of just $160,000. Bassoe Offshore estimates that the dayrate is even lower at $155,000. Interestingly, Brazil Energy Insight states that Transocean (RIG), Ensco Rowan (ESV), Seadrill (SDRL) and Petroserv were competing for the job and that some offers had dayrates above $200,000.
I believe that the following rigs were competing for the offer:
- Petroserv - Carolina. This is the company's only drillship which is currently warm stacked in Brazil.
- Transocean - Ocean Rig Santorini. The rig is currently under construction with scheduled delivery in 2019. Two Transocean's rigs, Ocean Rig Corcovado and Ocean Rig Mykonos, have received contracts with Petrobras earlier this year. Corcovado's dayrate was $195,000 while Mykonos' dayrate was $215,000 for contracts of a similar duration. For Transocean, bidding Ocean Rig Santorini for a Brazil job makes perfect sense both because two Ocean Rig drillships are already working there and also because the company needs to take delivery of the rig and put it to work. Surely, if Santorini competed for the job, its projected dayrate was above $200,000.
- Ensco Rowan - Rowan Reliance. Ensco Rowan has a number of modern drillships to offer, but Rowan Reliance's position in the U.S. Gulf of Mexico makes it the most likely candidate for the job.
- Seadrill - West Tellus. The rig is currently on contract with Petrobras, which ends in October 2019, which is very convenient since the new job awarded to Laguna Star starts at the end of October. It is yet to be seen whether Petrobras has the follow-up work for West Tellus or whether it will continue to hunt for the lowest possible dayrates.
Obviously, the low dayrate, be it $160,000 or $155,000, which is awarded for a two-year contract does not look good for the big picture. However, it looks like Constellation is an outlier and that big international drillers are starting to ask for a pay raise in a more aggressive fashion. In my opinion, we'll see such demands honored closer later in the year. While the drillship space is crowded, the number of top-tier rigs is not infinite, while many warm-stacked rigs have been without jobs for quite some time, raising their reactivation cost and the dayrate that makes such reactivation a rational move.
Constellation had a history of low bids for its drillships. Back in 2018, Bassoe estimated that a job with Shell (NYSE:RDS.A) (NYSE:RDS.B) for drillship Brava Star had a dayrate of $110,000 (!) while a job with Enauta for Laguna Star had a dayrate of $140,000. In this light, Constellation can be seen as a low-bid spoiler for major drillers, but the company does not reflect the general trends of the industry.
We will see updated fleet status reports from drillers this month, and I expect that the industry participants will be pickier in terms of dayrates. The industry cannot afford ~$150,000 dayrates locked for a couple more years, and $200,000 + bids for longer-term jobs will soon become the norm. Such dayrates are hardly a reason for celebrations, but a confirmed trend in the right direction should provide support for the beaten offshore drilling stocks. At this point, I believe that the market is too gloomy on drillers, but it looks like it starts to slowly change its mind in most extreme cases (Ensco Rowan).
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Disclosure: I am/we are long ESV. 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.