Big offshore drilling contractor Transocean, despite financial challenges during last year’s final quarter, remains bullish on industry’s future, predicting the current “up” business cycle for offshore drillers should run through 2006 and probably longer.
“We believe that based on current levels of bidding activity, 2006 will be a strong year,” Rob Saltiel, Transocean’s vice president of marketing and planning, said in its quarterly conference call Feb. 15.
However, while day rates for virtually every class of offshore drilling rig in the world are on the rise, they are not yet high enough to generate or justify a new round of deepwater rig construction, said Robert Long, Transocean’s president and chief executive officer.
Twenty-five of the world’s 26 latest-generation deepwater rigs, or so-called fifth-generation rigs capable of drilling in water depths up to 10,000 feet, would be available for lease after 2007, he said, adding that it would be mid-2008 before a new rig could be built and delivered.
“If any customer came to us talking about potentially being interested in a new build … we would have to ask him why he wanted to do that when we could give him any one of a half-dozen (Transocean) rigs that could satisfy his need,” Long said.
He added: “To date we’ve had no indication from any of the operators about having any interest in a new build rig (with) a long-term contract.”
Nevertheless, operators appear to be scooping up both deepwater rigs and shallow water jack-ups and at ever-increasing day rates.
In fact, the robust rates commanded by fifth-generation units “are now trickling down to other deepwater rigs,” Saltiel said, adding that competition is fierce for Transocean’s high-specification, “ultra-deepwater” rigs. He said day rates for this class rig are approaching $300,000.
“There is increasing competition among operators to secure the most capable rigs,” he said. “We see evidence of this with the signing of rigs nearly a year or more in advance of their contract expiration.”
Shell contracts for two rigs
A day before its quarterly conference call, Transocean announced it had been awarded a contract and contract extension by Shell Exploration and Production totaling a possible $228 million for two of Transocean’s high-specification rigs, the Discoverer Spirit and Deepwater Nautilus.
Discoverer Spirit, a drillship capable of working in waters up to 10,000 feet in depth, received an 18-month contract averaging $270,000 a day. Nautilus, a semi-submersible rig capable of working in water depths up to 8,000 feet in depth, received a 12-month contract extension averaging $220,000 a day. The two rigs are expected to begin work for Shell in September. Both units entered service in 2000 following their construction and represent two of Transocean’s 32 high-specification floaters, 13 of which are fifth-generation deepwater rigs.
In addition to the high-specification rigs, day rates are on the move for “mid-water” or second-generation floaters capable of operating in water depths of 4,500 feet, confirming recent reports by Transocean competitor Diamond Offshore that one of its rigs contracted for $110,000 a day.
Rates for second-generation rigs “have moved rapidly” from a range of the low to mid-$50,000 per day to more than $100,000 per day, Long said.
“I don’t know if we’ll get to the $145,000 level that we saw in some second-generation rigs in the second half of the 1990s, but I do think we have some nice upside from the current market rates,” he added.
Shallow water jack-up fleet sold out
Meanwhile, Transocean’s shallow water, international jack-up fleet continues “to experience sold out levels” due to both rig utilization and day rates trending higher, Saltiel said.
The company said that day rates for two of its rigs signed during late 2004 were above $70,000, an improvement of $55,000 to $60,000 seen earlier in the year.
“All the rigs we moved in the last six months are on the payroll and working into new locations,” Saltiel said. “We continue to take day rates a step higher for jack-ups as the markets where we operate continue to be tight.”
Transocean had tough fourth quarter
While Transocean remains bullish on the market, the company admittedly had a tough 2004 fourth quarter, reporting a loss of $73.4 million or 23 cents per share compared to a profit of $5.5 million or 2 cents per share for the same quarter in 2003. However, revenues for the final quarter of last year actually were up nearly 15 percent to $676.9 million vs. $591.5 million for the same period in the previous year.
Transocean’s loss in the recent quarter was due largely to rig downtime and a non-cash $167.1 million charge related to the “deconsolidation” or spin-off of its inland water division into a separately traded company called Todco, the company said. Transocean retained a 22 percent share of the new company.
The positive effects of higher average day rates and activity also were partially offset by repairs and idle time on the drillship Deepwater Millennium as the unit transitioned between contracts in the Gulf of Mexico, mobilizations of the drillship Deepwater Pathfinder to Nigeria and the semi-submersible rig Transocean Rather to the North Sea, and the warm stacking of the semi-submersible rig M.G. Hulme Jr., in Nigeria, the company said.
Long said that overall drilling costs also increased significantly during the quarter, but he assured investors that increases in rig day rates “are far out-pacing the increases in costs.” Nonetheless, he said the drilling industry will experience yet higher costs in 2005 relative to levels seen in the recent past, due in part to higher personnel costs necessary to support the increased level of offshore drilling activity.
“We had a great challenging time in the fourth quarter, despite improving markets in all asset classes,” Long added.
Gregory Cauthen, Transocean’s chief financial officer, said operating and maintenance costs for the first and second quarters of 2005 should each tally between $400 million and $420 million vs. $413 million incurred during the fourth quarter of 2004.
“We would expect costs to start to trend downward after the second quarter, but this depends on the level of contract preparation and rig reactivation later this year,” he said.
