Big day rates are rapidly escalating to record or near-record levels, taking even the largest offshore drilling contractors by surprise.
Three months ago Transocean chief executive Robert Long reported that rates for the company’s second and third generation offshore drilling rigs, for example, had moved from $50,000 per day in 2004 to around $100,000 per day. A week later, rates moved to a range of $145,000.
“I didn’t expect to see rates go back to the $145,000 range that we had seen in the 1990s,” he said. “Obviously I didn’t know what I was talking about.”
Since, rig rates for second and third generation offshore rigs have moved as high as $160,000 a day.
GlobalSantaFe chief executive Jon Marshall said that based on today’s tight rig market, coupled with reserve replacement challenges faced by exploration and production companies, “we may have entered a longer and more robust drilling cycle than we’ve seen in many years.”
Offshore drillers reaping benefits
Finally, after years of hardship, offshore drilling companies are beginning to reap the financial benefits of higher rig rates, spurred by the run up in oil and gas prices and the willingness of E&P companies to spend more on exploration and development drilling.
Transocean’s profit soared to $91.8 million or 28 cents per share in the 2005 first quarter from $22.7 million or 7 cents per share for the same quarter last year. Likewise, GlobalSantaFe’s net income for the first quarter of 2005 jumped to $50.2 million or 21 cents per share from $8.7 million or 4 cents per share in the year-ago period.
In fact, day rates for all classes of offshore drilling rigs across the globe are on the increase, according to Transocean and GlobalSanteFe, two of the world’s largest offshore drilling companies. The most expensive rigs — high-specification fifth generation ultra-deepwater rigs — are said to be fetching anywhere from $250,000 to $350,000 per day, up significantly from 2004 levels.
Industry’s fifth-generation rig supply is said to be constrained because of deepwater contract opportunities in the Gulf of Mexico, West Africa, Brazil and emerging regions like India and the Mediterranean Sea.
“We are seeing significant rate increases and in some instances the rates are reaching or exceeding historical highs,” said Roger Hunt, GlobalSantaFe’s senior vice president of marketing.
Investors: how high can rates go?
The rapid increase in offshore day rates has left investors wondering just how much higher rates can go before peaking. However, Transocean’s Long urged investors to focus more on the question of how long the drilling cycle can last than on the more difficult question of how high rates might go.
“With all the different prospective deepwater plays around the world, we think there is a very good chance that supply and demand (for deepwater rigs) remains favorable even out past 2008,” Long said.
He noted that if Transocean were able to roll over contracts for its entire deepwater fleet at current day rates, “our earnings capacity would really be remarkable.”
As always, a big fear among offshore drilling contractors during boom times is that industry might build too many new rigs in an effort to satisfy demand, causing day rates to plummet because of oversupply and increased competition.
There appears to be more overbuild concern with less-expensive shallow-water jack-up rigs than with deepwater floaters, which could run $450 million each in today’s market. Industry already has announced plans to build 30 to 35 new jack-ups over the next few years but no new deepwater rigs.
“I wouldn’t rule out the possibility that it (market) could absorb up to 35 more rigs, but if we keep announcing another two jack-ups every other week then we’re going to shoot ourselves in the foot like we always do as drilling contractors,” Long cautioned.
Jack-up market tight
GlobalSantaFe’s Marshall believes the jack-up market will remain tight at least through 2006. “We see that though 2006 there is enough incremental demand to take all the units that are coming out of the yard,” he added.
Rowan, whose fleet consists almost entirely of jack-ups, believes that it’s unlikely that construction of new offshore jack-up rigs over the next decade can keep pace with the expected world-wide demand for shallow-water drilling.
Rowan’s conclusion is based on the average number of new rigs expected to be delivered into the market each year vs. the attrition rate of older rigs, plus the relatively small number of shipyards around the world willing to build new jack-ups. The company noted that by 2010 more than 93 percent of today’s world-wide jack-up fleet will be over 20 years old.
“Going forward you’re really at a 40-rig deficit at the end of the 10 years,” said Danny McNease, Rowan’s chief executive officer. “That’s the reason why we believe the market is going to be so strong in drilling products and new construction.”
Carl Thorne, chief executive of offshore drilling contractor Ensco International, noted that the total number of jack-ups in the world today, including existing rigs and the announced new builds, is actually less than it was back in 1990.
“The fleet is 10 or 11 rigs short of what it was in 1990 because of attrition,” he said. “So the fleet has actually shrunk in size.”
No new orders for deepwater rigs
The deepwater rig market has less to fear from overbuilding. No orders have yet been placed despite the fact the market is tight and day rates have passed the point where new construction is justified.
“If you can get a five-year contract for something like $325,000 day you could build it (rig) for $450 million or something like that,” Transocean’s Long said.
However, he said that unlike previous drilling cycles, operators this time around have been reluctant to enter long-term contracts, which generally leads to new rig construction.
“No one is willing to commit because basically they would be committing to take a rig to 2014 because it wouldn’t get delivered until 2009. Then you would have a five-year contract,” Long said. “The difference in this cycle so far in the floater business has been that operators are almost price sensitive.”
Nevertheless, he said contract durations for Transocean’s fifth generation rigs are lengthening, as evidenced by recent contract awards for the company’s semi-submersible rigs Sedco Energy and Deepwater Horizon for two and five years, respectively.
Long said his company is in advanced discussions with various customers regarding seven high-specification floaters with rates ranging from $260,000 to $350,000 per day and contract durations from a single well to several years.
At present, 89 percent of Transocean’s fifth-generation fleet days are committed to firm contracts in 2005, while 64 percent of the fleet days are committed in 2006. Also, 58 percent of the company’s other floater fleet days are under firm contract in 2005, while 17 percent of the days are committed in 2006.
