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Offshore Drilling Contractors and the Pig Cycle

|Includes: BP, ESV, GLNG, NBL, PBR, RDS.A, RIG, Seadrill Limited (SDRL), XOM

Look at FRO or DRYS or the several well written articles at seeking alpha about their rise and fall. All the ship owner industry is in a crisis?

No, their are at least two segments where the sun shines bright: LNG Carriers and deepwater/ ultra-deepwater rigs.

Stocks like SDRL and Golar LNG - both are John Frederiksen companies - are performing very well.

But how long will this growth story last? On the one hand it is true, that the world's demand for oil does not decrease and it probably will even rise. The oil price may be volatile but let us assume, it will rise also. 

Based on this assumption it will economically make sense, to explore and exploit deepwater and ultra deepwater oil fields. I think this is true at oil price above 80 USD / barrel WTI.

But could it happen that the ship owners destroy their business by increasing their fleets stronger than the demand growth? May they overestimate scrap rate? Due to the management presentations at f. e. pareto oil conference their is only one problem: The drilling contractors cannot order and take delivery enough newbuilds as the customers will aks for.

And according to this article even the 21 rigs which Petrobras does not want to hire externally but build and operate by its own is not a problem:

But what did we hear from the Management of container, dry bulk and crude carrier ship owners some years ago? 

Is their really a unique selling proposition of the Drilling Contractors or how strong will the market entry barriers are? If they consist just of the financial aspect to invest high amounts of money, we will probably see, that not only Petrobras but also CNOOC, PetroChina, Reliance Industries will follow. 

If it is the experience and technological advance, I think that Exxon, Royal Dutch Shell, BP, Chevron, etc. have enough know how to insource this business. As long as it is more profitable to own and operate rigs than the upstream itself, insourcing makes sense.

I think this is not a near term topic. At least until late 2013, when the majority of the ordered rigs of the current newbuild cycle will be delivered, dayrates will increase and demand will outstrip supply. And there are a lot of open question, f. e. those mentioned in this instablog. I will observe this topic.