Is Seadrill Well Positioned To Take Advantage Of The Offshore Drilling Market?SDRL) offshore assets in deepwater and ultra-deepwater drilling continue to be a major advantage. The drilling units used in dee-water and ultra-deepwater drilling are called floaters, consisting mainly of semi-submersible and drill ships. Seadrill has around 15 semi-submersible and seven drill ships operating globally. The company has ordered another eight drill ships and four semi-submersibles.
One reason deep-water drilling will grow in the coming quarters is the increase in deepwater discoveries.
The high offshore reserve potential of oil and natural gas is driving demand for more deepwater rigs, since these deep-water oil discoveries will go into development in the next few quarters. For instance, Seadrill secured a contract with Chevron (CVX) for its drill-ship West Tellus for a day rate of $635,000 from January to July 2014. Seadrill has around 94% of its floaters as sixth-generation ultra-deepwater rigs, which can drill at great depths. The average day rate for floaters (drill ships and floaters) varies between $205,000 to $434,000, while the day rate of Seadrill floaters ranges between $398,559 to $653,121.
The offshore drilling industry expects around 39 deep water rigs across the globe to come off contract in 2014. Seadrill will have four floaters come off contract in 2014, according to its fleet status report, whereas competitor Transocean (RIG) will have 14 deep water rigs come off contract. Certain regions, however, such as West Africa and the Gulf of Mexico, are expected to absorb these deepwater rigs. West Africa, for instance, could reflect a demand of 10 to 15 deepwater rigs. Seadrill has three floaters there, while Transocean has eight. Meanwhile, further demand for deepwater rigs in the Gulf of Mexico will be driven by oil and gas reservoirs in the Lower Tertiary region. Seadrill has five floaters in this region, whereas Transocean has 14. The Bureau of Ocean Management plans to auction three leases in the Gulf of Mexico for deepwater and ultra-deepwater drilling. These drilling licenses will likely create further demand for floaters.
The Jack-Ups Are on a RollWhile gaining strength in the deepwater and ultra-deepwater segment, Seadrill is also well positioned with its fleet of premium jack-up rigs. More than 70% of the company's operating rigs are five years old or less, and it has nine rigs under construction. Seadrill's jack-ups can work at depths of 350 to 450 feet of water. This young range fleet is advantageous as the jack-up rig market is phasing out older rigs. The phase out of older rigs is likely to create demand for high-capacity jack-up rigs.
Demand is thus expected to surge in major jack-up rig markets such as Southeast Asia, the Middle East, and the North Sea. Seadrill has contracts for seven jack-ups in the Middle East, eight jack-ups in Asia Pacific, and two in the Atlantic region. Transocean is also increasing its fleet of these rigs. It currently has 12 high-specification jack-ups and five more under construction. Transocean plans to have around 40% of its rigs as high-specification jack-ups.
Important to observe is Seadrill's timing in ordering new jack-up rigs and bringing them into operation, which could result into better deployment of these rigs. The company expects more than 220 jack-up rigs worldwide will exceed 30 years of service by 2015. Seadrill plans to bring into operation five new jack-up rigs into the offshore drilling market in 2015. These new rigs are likely to find a ready market, leading to better contracts on day rates.
More Performance can be ExpectedSeadrill's revenue is expected to grow in the coming quarters because of its high-specification asset base of jack-ups and floaters. The company has an extended asset base of high-capability ultra-deepwater rigs, demand for which is likely to rise as the oil companies improve replacement ratios. So it is expected that Seadrill could secure more deals for its floaters that come off contract in 2014.
In addition, the high-specification jack-up rigs are expected to have an increased demand in the coming quarters. Moreover, Seadrill plans to introduce new jack-ups when demand is rising. This could help the company to get better deals on those assets, resulting in better margins.
Published on Feb 19, 2014By Rohit Gupta
Posted in ...Market Commentary