Transocean, Seadrill and Ocean Rig sign big contracts!

Recent contracts for offshore drilling operators, suggest that the sector is strong. One example is Seadrill’s four-year contract with Statoil announced on 9 September. This USD 787m contract (which includes a USD 50m mobilisation fee) takes the order backlog to about USD 13bn or 3.2 times expected 2011 revenues (up from 3.0).

In chart 1 we have listed the historical day rates for ultra-deepwater rigs (rigs that can drill deeper than in 7,500 feet of water depth) which are the most attractive segment of offshore drilling.
 
As can be seen there was a shift in day rates from 2005, when new generations of rigs entered the market and day rates have stayed above USD 400,000/day ever since. After its peak of over USD 600,000/day in 2008, the expected range is now USD 450,000/d – 550,000/d for new contracts.
In chart 2 we have listed the last published contracts in the market from August and September 2011.

 

As can be seen, Seadrill’s rig West Hercules is entering a contract which is at USD 490,000/d, down from USD 515,000/d in its current contract. However this new contract is a four-year contract, making the total contract very lucrative (also the previous contract was signed at the market peak in 2008). Moreover, Transocean’s rigs are entering into contracts that are up about 3 percent each from their current levels. Ocean rig’s Poseidon is entering its first contract which is quite strong at USD 576,000/d. All contracts are within or above the current expected range of USD 450,000-550,000/d.

Ocean Rig has estimated that the break-even level of a drillship is about USD 340,000/d (see chart 2). Although this should only be seen as a rough indicator, there are no doubts the drillers are making cash and will continue to make cash through these iron-clad contracts. Furthermore the big oil companies have about 50 projects that currently need rigs so it is a tight market, meaning that contract values should stay at current levels or rise.  The conclusion being that offshore drilling companies are currently, despite the financial turmoil, receiving contracts well in line with the expected price range, which indicates a strong offshore drilling market.

Market Risk
Previously, in Big driller’s cash flow, we highlighted the lucrativeness of the strong order book within offshore drilling. The latest contracts are merely a confirmation of this view. However, as we highlighted then, in troubled stock market times, investors tend to sell indiscriminately. So regardless of the cash generating machines that drillers are, they will probably follow the market further down if it turns. Only when fundamentals are appreciated will the drillers’ share prices perform well again. Bear in mind that last time (2009) the rebound was very aggressive.