As bleak news continues to stream out of the offshore drilling industry, it pays to keep an eye on fleet status reports to see if any light is appearing at the end of the tunnel.
A diamond that does not shine
As previously announced, Diamond's Ocean Lexington vessel has been contracted out for just over three years at a rate of $160,000. Analysts have noted that although this day rate is low, it is better than nothing. The alternative would have been for Diamond to cold stack the rig.
Cold stacking involves shutting down the rig for an extended period of time. The workers are put on leave or laid off while the hatches are sealed or welded shut. Key personnel are kept, but the rig is stacked or stored in an offshore location or harbor. This is not a simple process, and the rig usually requires a lengthy period of maintenance and hefty investment before it can be brought back to active service.
Diamond already has four rigs cold stacked: Ocean Spartan, Ocean New Era, Ocean Whittington, and Ocean Epoch.
All the cash it can get
Unfortunately, Diamond is going to have to accept lower rig rates going forward as the company is going to need all the cash it can get.
It was recently revealed that one of the company's customers, Statoil ASA, had terminated its drilling contract for the midwater semisubmersible Ocean Vanguard. This contract was supposed to bring in $454,000 per day for Diamond and was estimated to conclude in accordance with its terms in late February 2015.
Diamond is disputing the cancellation and is likely to receive a cancellation fee from Statoil. Still, it's worrying to see contracts of this size cancelled. The demand is just not there.
While Diamond is struggling to keep its fleet in active service, and "squeezing cash out" as some analysts put it, Ensco released an extremely positive update.
The bright side
Ensco's most recent fleet update revealed that its ultra-deepwater newbuild drillship Ensco DS-8 has been given a five-year contract with French oil giant Total to drill offshore in Angola.
The contract starts during the third quarter of 2015 at an initial rate of $610,000 per day, far above forecasts. Specifically, forecasts were calling for a day rate of around $500,000.
That's not all. Ensco is entitled to periodic increases in the day rate, which implies that the company will be receiving on average $650,000 per day during the course of the contract. That's a backlog of just under $1.2 billion.
Nevertheless, this positive news has not stopped the skeptics from expressing their opinion. Analysts have pointed out that this does not signify a wider recovery in drilling day rates. Negotiations for this contract began back during 2013, when the rig market was stronger. Unfortunately, Total bid this high price for the rig and is tied in.
That being said, with the current weak rig market expected to last into 2015 and 10 ultra-deepwater assets newbuilds scheduled for 2014 delivery while an additional 16 are without contracts, it is possible that Total could demand a lower rate.
Overall, the recent fleet updates from both Ensco and Diamond show that the offshore drilling market remains under pressure.
Still, Ensco's contract with Total is good news. The higher-than-average day rate will certainly boost earnings. However, there is the risk that Total could follow Statoil's lead and cancel the contract due to the higher rate. Total could easily sign a new contract with one of Ensco's peers for a new drillship at a lower rate.
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