There continues to be much confusion about what's going on in the world of offshore drilling.
Depending who you talk to, half of Wall Street believes that the sector is good value and should be brought for attractive dividend yields and low valuations. Meanwhile, the other half of the Street believes that the sector should be well and truly avoided.
Analysts have turned negative on Ensco as even after the delivery of the company's new floating rigs, the company will unfortunately still rely on its old jack-up rigs to generate around one third of sales. This will be an issue going forward.
In fact, one thing that analysts universally agree on around the world is the fact that jack-up rig day rates could fall as much as 35% over the next year or so as new units enter the market.
This slew of new units, ordered during the boom times, is set to hit the market during the next few years. Unfortunately, the oil industry is also starting to squeeze costs, and a number of rigs are coming off contract during the same period, creating a perfect storm.
When all these factors combine, it means that customers have the upper hand when it comes to contracting out drilling units. This will let them renegotiate at lower prices. That's bad news for companies with larger jack-up fleets such as Ensco.
Of course, analysts remain positive on Rowan Companies, despite the fact that the company's fleet is almost entirely jack-up units.
Why? Because one of the company's largest customers is Saudi Aramco, which according to analysts, is known for tying up rigs for extended periods for high day rates.
This actually showed through in Rowan's first quarter conference call when management revealed that Saudi Aramco had extended the contracts for all three of the Rowan jack-up units that were working for the state-sponsored entity, which were set to come off contract during the quarter.
Specifically, two of Rowan's units, the Scooter Yeargain and the Hank Boswell, were both extended for one year to $180,000 per day, up from the existing rate of $127,500. The Rowan Mississippi was also extended for one year at a day rate of $195,000 per day, up from the existing base rate of $170,000 per day.
Negotiations are ongoing with Saudi Aramco for the remaining four units scheduled to come off contract in 2014. Based on the above transactions, however, it would appear that Rowan's units within the Middle East are likely to find themselves in full employment for the next year or so.
Ensco does have some of its jack-up units contracted out to Saudi Aramco, but it's only eight out of 41 units. These units on contract to Saudi Aramco are also on some of the lowest day rates in Ensco's entire fleet, meaning that while Ensco's jack-up fleet has exposure to Saudi Aramco as a high-quality customer, the revenue contribution is low as a percentage of the overall fleet.
The key takeaway here is the fact that Rowan, despite being highly exposed to the jack-up market, is safe due to the fact that its units are on contract with Saudi Aramco, a great customer. On the other hand, Ensco is more exposed to the jack-up market and only a few of its rigs are with Saudi Aramco, and those are at very low prices.
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