Deepwater rig market said to be in pullback mode: analysts

Houston (Platts)--10Mar2014/617 pm EDT/2217 GMT

The global deepwater rig market, which was booming for the past few years, appears to be pulling back, with contract dayrate expectations for even high-specification rigs down about $50,000/d from late 2013 and at least one rig temporarily idle, observers said.

The trend, which began to surface last year, was initially thought to be one of supply -- the sheer number of newbuild floaters announced in 2010-2011 that are only now coming into the market. But experts are now acknowledging demand may also be an issue, International Strategy and Investment Group oil services analyst Jud Bailey said.

On the supply side, David Ethan Hensel, driller Ensco's senior vice president of marketing, said last month 27 new semisubmersibles and drillships are slated for delivery by year's end, of which 13 are uncontracted. Five of these are in discussions with operators and may find work this year, he said, but that still leaves eight without contracts, at least for now.

The demand issue appears to center around costs, FBR Capital Markets analyst Thomas Curran said in a note last week, referring to a recurrent theme at the recent IHS CERAWeek conference in Houston. Chevron CEO John Watson said at the gathering that offshore rig costs rose fivefold in the last 10 years and spoke of the industry's "new reality," a big part of which centers around higher price tags.

"International oil companies have cut back on exploratory budgets and deferred certain development projects," Curran said.

Scott Gruber of Bernstein Research said, "Few disagree that the offshore drilling industry is on a precipice of a market correction." But, in a recent investor note, he said "there is much debate regarding how intense the correction will be."

Gruber said rig dayrates "are on a slippery slope downward and the magnitude of the decline will likely surprise negatively."

One piece of data that has buzzed around industry in recent weeks shows a potential gauge of tumbling dayrates. Analysts said an item published a few weeks ago showed the drillship Dhirubhai Deepwater KG1, owned by big global driller Transocean, being bid in Brazilian waters at a dayrate in the mid-$400,000s. The rig is contracted with Reliance offshore India at a rate of $510,000/d until July.

Bailey said previous leading edge rates for that asset class -- the rig can work in 12,000 feet of water and drill down to 35,000 feet below the seabed -- was in the $550,000-$570,000/d range.

Transocean did not immediately answer questions Monday on the tender put out by Brazil's state-controlled Petrobras. But Terry Bonno, Transocean's senior vice president of marketing, said on the company's February 28 quarterly conference call that the tender was not over and there was a 45-day validity to any bid placed in Brazil.

"This is ... something that we're certainly interested in," Bonno said. "We'll just have to wait and see how it plays out."

Transocean's idle ultra-deepwater rig, according to Bailey, who cited specific published industry information, is one of three Transocean Development Driller semisubmersibles in the Gulf of Mexico.

Bonno has said the driller is "in discussions" on work for the rig and declined further comment.

SLUMP 'LIKELY TO LAST LONGER' THAN ANTICIPATED

FBR's Curran said signs of a slump first cropped up in mid-2013 and from there "morphed, in industry's view, from an expected rough patch to a stretch as contracting dynamics deteriorated across the board." It encompassed not only rig dayrates but offshore tender volume, rig contract lengths and rig sublet trends, he said.

But in the last couple of months, Curran said, "it became clear that the global floating rig market imbalance was likely to last longer and prove more severe than many had first anticipated."

On a broader level, Bonno said the current offshore market appears similar to 2002-2004, a period "characterized by ... initial decrease in demand with the markets remaining stagnant over a period of 18 to 24 months, weak deepwater and midwater markets, as we're already seeing customers delaying programs and an increase in sublet activity."

Bailey, who wrote about this phenomenon earlier in the year, said that in the early 2000s companies looked less to grow than capture higher project returns and return cash to shareholders -- which appears to be their current focus.

Back then, the largest upstream companies such as BP, Chevron, Exxon (now ExxonMobil) and Conoco (now ConocoPhillips) were transforming into supermajors, and slashed their capital budgets meaningfully, he said.

"I don't think we'll see those types of capex cuts, but it's definitely spelling out a flatter spending environment," he added.

However, Bonno said she expected "year-on-year demand to continue to grow, assuming ... commodity pricing remains healthy."

REPORT OUTLINES DRILLERS' ISSUES

Ensco's Hensel said floater inquiries at his company were "down slightly" from Q3 2013, although the number of rig-years represented by those inquiries "was on par with prior quarters."

Hensel acknowledged "some floaters" have recently gone idle, but linked that to new supply into the market, lack of drilling success in a few cases, bankruptcy of formerly active Brazilian operator OGX and delays in regulatory approvals. He also noted Ensco this year inked a three-year contract at $550,000/d for its new DS-9 drillship in the Gulf of Mexico.

While that sum is "5-10% below recent ultra-deepwater newbuild contracts [in that region], we think that giving up a small amount of rate to get a foot in the door with a major customer ... is a good tradeoff," Cowen and Company analyst J.B. Lowe said.

According to a report by Barclays, drillers in recent fourth-quarter calls spotlighted several issues that included cancellation of some drilling programs, a slowdown in bid tenders, unsuccessful appraisal wells and delivery of newbuilds without initial contracts. Drillers will typically seek contracts for a new deepwater rig months to a couple of years before its completion.

"We think conditions will continue to soften in the coming months, and the likelihood is increasing for older idle units [or rigs rolling off contract] to be cold-stacked in mid-2014," the Barclays report said. "As a result, we see growing scope for 4th- and 5th-generation rigs to compete downmarket and exacerbate the pending retirement cycle in the midwater."

--Starr Spencer, starr.spencer@platts.com
--Edited by Jason Lindquist, jason.lindquist@platts.com

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