GoM: Deepwater rig rentals sinking on rig glut
08 Dec 2009
Transocean Ltd. and Diamond Offshore Drilling Inc., the world’s biggest deepwater oil drillers, may face a drop in rig-rental revenue because of a glut of vessels that can operate in oceans two miles (3.2 kilometers) deep. The oversupply will develop in 2011 as rigs that drillers started building when oil prices surged to a record last year are completed, said Jud Bailey, an analyst at investment bank Jefferies & Co. in Houston.
Rig rents are likely to drop some 10 to 15% and stay down until new deepwater developments create enough demand to end the surplus in 2012 or 2013, he said.
“It was a classic case of panic on the part of operators when oil was over $100,” Bailey said. “A part of that panic was just the fact that they couldn’t get a rig. When that psychology reverses, it can be a pretty powerful dynamic.”
Of the so-called ultra-deepwater rigs scheduled for completion between now and the end of 2011, 22 don’t have contracts to drill, according to researcher ODS-Petrodata Inc. in Houston. The most ultra-deepwater rigs to sit without a contract was three in April 2004, said Tom Kellock, head of consulting and research at ODS. Today there is just one.
Rents for rigs capable of drilling in waters at least 7,500 feet deep surged above $600,000 a day last year as producers tried to boost reserves with oil projects made economical by high crude prices. The deepwater class includes drillships that resemble cruise liners with drill towers, and semi-submersible rigs, which are built around an oil derrick.
Operators of new rigs looking for business in 2011 will compete with existing rigs finishing contracts and contracted rigs subleased by producers that wind up not needing them, Kellock said. Including the new additions, there will be 117 ultra-deepwater rigs floating around the world in two years, he said.
“In the last building cycle, almost all the rigs being built had long-term contracts,” Kellock said. “This time, there’s been more speculative building.”
An oversupply could knock rates down as much as 20 percent, said Lewis Kreps, an analyst at C.K. Cooper & Co. in Dallas.
Pride International Inc. and Ensco International Inc. are among drillers that may weather a glut the best, Bailey said. “Most of their rigs are contracted for the next several years,” he said.
Geneva-based Transocean and Diamond Offshore of Houston are among the contractors that could be pinched most because they will have the most spare capacity, Bailey said.
Transocean spokesman Guy Cantwell declined to comment on Bailey’s assessment. Stability in oil prices over the past two quarters is inspiring confidence and conversations regarding the four ultra-deepwater rigs Transocean will have available are “gaining momentum,” Vice President Terry Bonno told investors on a Nov. 4 conference call.
US oil futures, which climbed above $147 a barrel in July 2008 before tumbling to $32.40 five months later, have stayed above $70 since October the 9th.
Diamond Offshore has a lease backlog that will serve it well through 2011, company spokesman Les Van Dyke said. He said he expects all five of the company’s ultra-deepwater rigs to be under contract in 2011. “We’re not overly concerned about it,” Van Dyke said.
Transocean’s shares, which had jumped 76 percent this year before today, will climb 27 percent in the next 12 months, according to the average of analyst price estimates. Diamond Offshore was up 66 percent this year, and analysts predicted a gain of 7.6 percent in the next 12 months.
Houston-based Pride, which had more than doubled in value this year, will rise an additional 5.9 percent, analyst estimates indicated. Ensco, based in Dallas, had climbed 48 percent in 2009 and was predicted to gain 21 percent.
James Wicklund, chief investment officer at Carlson Capital LP in Dallas, said that based on the outlook for rig supply, investors should buy Pride and Ensco now. By late next year, it would make sense to buy Transocean and Diamond Offshore in anticipation of a stronger deepwater market after 2011.
Roger Hunt, senior vice president of marketing at Geneva- based driller Noble Corp., said producers and drillers are waiting to sign contracts to see “who blinks first” on price. “I’m confident that demand build is there, but the operators are working hard to shield it,” Hunt told investors on an Oct. 22 conference call. “It’s not for the meek. It’s a waiting game.”
Kevin Robert, senior vice president of marketing at Pride, likened producers to discount shoppers at a department store. “When you expect there’s going to be a sale on at Dillard’s for suits in two months, you don’t go buy one now,” Robert said in an interview.