How Well Are These Offshore Drillers Prepared for Emerging Industry Trends?

Analysts believe that the offshore drilling sector is about to hit a rough patch, but how well are Transocean, Seadrill, and Ensco prepared?

Feb 18, 2014 at 1:37PM

Many analysts currently believe that the offshore oil and gas drilling industry is about to be hit by a slowdown as producers reduce exploration spending. This is only the opinion of some analysts, but it helps to have a good understanding of these views if the worst case plays out. So, here is a quick overview of the drilling fleets of the three largest offshore drillers, Transocean (NYSE:RIG)Seadrill (NYSE:SDRL), and Ensco (NYSE:ESV), so that you can develop your own view on the industry's future.

Changing industry
Ever since the Gulf of Mexico disaster involving BP, Transocean, and Halliburton, E&P companies commissioning the services of these drillers have demanded more technologically advanced equipment from drilling companies to increase safety. As a result, there is a need for new, high-spec units and also harsh environment drilling units, as both of these can drill further, faster, and safer than the older units. Ultra-deepwater, or UDW, harsh environment units allow oil companies to drill in ever more extreme environments in the everlasting drive to discover new oil reserves.

Indeed, deepwater drilling is set to dominate the oil E&P industry over the next decade. According to data from analysts at Wood Mackenzie, the size of the deepwater drilling market is expected to expand from $43 billion during 2012 to $114 billion by 2022. Both the number of wells found in deepwater and the value of discoveries in deepwater have far exceeded the value of oil found in other areas around the world.

All in all, this means that drillers with the newest UDW capable fleets are well positioned to profit over the next few years. Over 90% of Seadrill's floater fleet is UDW capable and 100% of the company's jack-up fleet is able to drill past 350 ft. However, less than 50% of Transocean's floater fleet is UDW capable. So, despite being the largest offshore driller, Transocean has some catching up to do.

Further, as a relatively new entrant to the offshore drilling market, the average age of Seadrill's fleet is less than that of larger peer Transocean. The average age of Seadrill's floater and jack-up units is approximately five years. Meanwhile the average age of Transocean's fleet is closer to two decades -- this is the most concerning factor.

Attractive growth will be hard to come by
Unfortunately, Ensco sits in an even worse position than Transocean when it comes to fleet age and drilling capabilities. Ensco has only 16 UDW drilling units, around 35% of its total fleet, despite having over 45 jack-up drilling units and a number of floaters. Additionally, the average age of Ensco's jack-up units is over 25 years; that's more than four times the average age of Seadrill's jack-up fleet. That being said, the company does have a number of floater units, which have an average age of around 14 years. After taking these numbers into account, it would appear that Ensco is badly positioned for drilling industry trends as UDW drilling activity grows.

Foolish takeaway
Wherever you look, it would appear that analysts are turning against the offshore drilling industry. It's not all bad news, however, and some companies are better positioned than others to remain ahead of the curve in the medium- to long-term. Nevertheless, although Seadrill may appear to be well positioned right now, things can change, as with any investment, and there are other factors to consider, like the company's debt pile or Transocean's new-builds.

A safer bet on offshore drilling
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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