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Ultra-Deepwater Rigs 'Essentially Sold Out' Until 2014

Prospects for offshore drillers look promising over the next few years, especially for ultra-deepwater (UDW) rigs, which are "essentially sold out" until 2014, according to Raymond James & Associates Inc.

Analysts Collin Gerry and Lenny Bianco compiled data on global offshore operators on a year-to-date basis and found that offshore drilling, up 22% so far this year, is one of the best performing oilfield service sectors to date.

"We can't ignore the potential for sector rotation out of the recently outperforming offshore drillers into the more beaten down North American land-centric names," wrote the duo in a note. "This is partly due to uncertainty in the direction of North American land earnings per share (EPS), an issue that the current EPS season is signaling to be more resilient in the near term than once feared."

However, don't lose sight of the strong supply/demand fundamentals offshore, they said.

"In the near term, we believe that we are essentially sold out of UDW rigs until 2014, which ushers the prospect of taking leading edge rates north of the $650,000/day mark, up from the current $550,000-600,000/day range. Longer term, we believe the global demand picture is strong enough to absorb the current newbuild supply."

An estimated 180 marketed floating rigs were in the world in 2007, said the Raymond James analysts. By 2013, there are expected to be 300, up 67%.

"Normally this would be an alarming rate of capacity growth. However, this growth has been matched and/or outpaced by increasing demand," with much of that because of UDW growth.

"In 2007 the UDW market was less than 10 years old and represented only 19% of global floater capacity," wrote Gerry and his colleague. "By 2013 UDW will represent nearly half of the market. This is a big shift in a short period of time."

There has been "somewhat of a roller coaster ride over the last few years," first with the 2009 recession "that killed new demand," followed by the Macondo well blowout in April 2010, which delayed the recovery. "However, beginning in late 2011, we finally began to see a healthy demand in contract behavior."

Demand worldwide for UDW rigs is driven mostly because of growth in the U.S. Gulf of Mexico (GOM), Brazil and West Africa, said the analysts. Historically the GOM was one of the first major UDW basins and until Macondo "was exhibiting steady growth," noted the duo. Pre-Macondo the GOM was running 30 floating rigs and was contracted to add 10 more to bring total floater demand to 42.

"As we stand today the outlook is considerably more positive than it has been for the previous two years, as permitting activity has shown considerable improvements and we're finally starting to see optimism on the part of exploration and production operations regarding future drilling in the Gulf. As a result, we believe that drilling in the Gulf to be an overall growth market that could add five to 10 rigs per year."

By 2015, the GOM could have another 20 rigs drilling, the Raymond James analysts said.

Worldwide, said the analysts, "known" demand for about 27 rigs "should keep the market fully absorbed through late 2013. If we consider the prospect for an incremental 10-15 direct negotiated contracts, then that's the ballgame. We're out of rigs until 2014."

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