Steer Clear of These Offshore Drillers

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In its latest fleet status update, deepwater titan Transocean (NYSE: RIG  ) revealed some more rot in the shallow end of the drilling pool.

The firm has stacked (i.e., de-crewed and stopped actively marketing) four more jackup rigs. Two are standard jackups now sitting in Malaysia, the GSF Adriatic XI and the GSF Rig 136. It's interesting that both went from contract work to stacked, with no idle time in between.

The other two stacked jackups are so-called "high-specification" rigs -- meaning they have all the bells and whistles an operator could wish for. The GSF Galaxy I had been working for BP (NYSE: BP  ) in the UK North Sea for the past year or so. The GSF Galaxy II, also serving the UK market, has been idle for months. I told you this was shaping up to be another dead sea.

The weakness evident in shallow water markets not only in the Gulf of Mexico, but around the world, reaffirms my belief that drillers like Hercules Offshore (Nasdaq: HERO  ) and Seahawk Drilling (Nasdaq: HAWK  ) are to be avoided.

Of course, the shaky demand doesn't end there. Also reported in Transocean's update was the stacking of a few midwater floaters. This is the next step up the totem pole in terms of water depth (1,000 to 4,000 feet) and drilling complexity.

The Sedco 700 had been plugging away for Total SA (NYSE: TOT  ) at a rate north of $400,000 per day. Now? Zippo. The GSF Arctic III has also been left out in the cold after doing a stint for Eni (NYSE: E  ) in Libya. Pride International (NYSE: PDE  ) now sports some idle rigs in this category as well.

The market for contract drilling now looks more bifurcated than ever. For my recent peek at deepwater demand, which continues to look robust, click on over here. And if you disagree with my assessment or think I've missed anything, drop me a line in the comment section below.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. Total is an Income Investor pick. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (9)

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  • Report this Comment On October 09, 2009, at 7:39 PM, Curmudgeon44 wrote:

    You make it sound like RIG is one to be avoided, one has to read half the article to identify what is to be avoided. RIG is one of the premier suppliers of drilling services to the deepwater sector. Hard to forecast what oil prices will do, but if the world economy has much recovery we could well revisit crude prices of $140 per bbl. Think about China and India, growing 6+%... and remember that commodities such as oil are used in proportion to economic activity. Nat gas deposits are likely to be in deep water too, though that is for a future era. When and if high oil prices return, there will be a demand umbrella over drillers, deep and shallow alike. One could make a long term argument for investing in many of these drillers.

  • Report this Comment On October 11, 2009, at 3:38 AM, ValuePEG wrote:

    You stated that it was interesting that RIG moved the standard jackups directly to stacked, this is by far the best thing they could do. No other offshore driller has the capacity nor the cash flow to set aside assets to help protect the dayrates the way that Transocean (RIG) does. They have stated publicly that they would prefer to stack jack-ups and protect the dayrates for long-term then to compete for the lowest dollar just to have them in use. BTW, this will not affect the bottom line, if you de-crew as the author stated then you are cutting costs, in lieu of making a few bucks keeping them active. The real reason this will not hit the bottom line is the author didn't seem to notice all the NEW contract prices that continue to be higher, combine this with the newbuilds hitting the market w/ multi-year contracts and their revenue is safe or even growing w/o those stacked rigs.

  • Report this Comment On October 11, 2009, at 12:58 PM, cgoetzus wrote:

    Transocean stacking low spec jack-ups is not necessarily a bad thing. They are removing 'old stock' from the market place in a effort to maintain the price levels of other assets. The average dayrate for a jackup is ~100k according to rigzone. And RIG is on eof the few companies that has the ability to impact the market. RIG controlls 147 rigs I believe that is more than the next 3 contractors combined.

    You counter this argument with the BP example however.

  • Report this Comment On October 12, 2009, at 8:39 PM, tedted73 wrote:

    For HAWK there is a pretty low downside because the rigs, if sold for scrap and equipment would probably be worth around $25 a share. Management has stated that they could probably get more. Also this business used to generate over $250mm in EBITDA which means it could be worth over $60 a share when the market rebounds.

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