Had you never witnessed a downturn in the cycle, you might think the oil-rig game is ... rigged. With oil and gas behemoths like BP
Just as refiners are hooked on the crack spread, drillers depend on dayrates. Today's elevated offshore dayrates are a primary reason that sector leader Transocean just reported operating income 131% above Q1 2006. Average daily revenues were up 15% sequentially, which is downright delightful.
Best of all, contracts are not merely going higher -- they're running longer as well. At last month's Howard Weil Energy Conference, Transocean stated that average new-build contracts are more than five years long, and fetching $416k/day. Top deepwater contracts are going for north of half a million dollars a day, which pays back the cost of a highly specialized rig roughly halfway through a five-year contract.
With dayrates far exceeding replacement cost rates, the drillers have an incentive to order more newbuilds. Transocean has a bunch of high-spec floaters under construction, and 75% are already contracted by the likes of Norsk Hydro
If we were seeing a lot of these top-dollar rigs being built on speculation -- that is, with no contract attached -- then I would strike a more cautionary tone at this time. However, Transocean's order backlog is very robust, and management is getting increasingly confident about the strength of the market through 2010. No shameless cheerleaders they, this management team tells it pretty straight. They're saying the market is too readily discounting a nearer-term downturn in the cycle, and I'm tempted to agree.
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Fool contributor Toby Shute doesn't have to participate in fire drills anymore, now that he's writing for the Fool full time. He doesn't own shares in any company mentioned. Norsk Hydro is an Income Investor selection. In case we haven't drilled it into your head by now, we remind you that The Motley Fool has a disclosure policy.