2014 has been a year of heightened nerves for offshore rig lessors. The main concern seems to be in a possible oversupply of offshore rigs. Dayrates, many believe, will necessarily have to drop.
So far in 2014, we have seen fewer transactions, but what activity we have seen offers some key insights into the offshore rig market. Unfortunately, since many midwater rigs went for undisclosed dayrates, this article must stick to deepwater and ultra-deepwater rigs.
All three recontracted deepwater rigs were built in the 70s. Diamond Offshore (NYSE: DO ) accounted for two of the three. One of these two was contracted at a price 26% higher than that of its previous agreement, and the other was contracted at 17% lower than its previous agreement. The third rig, from Transocean (NYSE: RIG ) , must be the tiebreaker. Transocean's Discoverer 7 Seas went for 20% less than that of its previous contract. From what we can see here, older deepwater rigs seem to be fetching lower dayrates.
Since the start of 2014, five ultra-deepwater drillships have been contracted, excluding Seadrill's (NYSE: SDRL ) very recent West Jupiter. Interestingly, all ultra-deepwater drillships either went for the same dayrate or a higher dayrate when compared to previous contracts. Two of the five went for prices over 20% higher. For example, Pacific Drilling's Pacific Bora went for 30% more than it did for its previous contract. The Pacific Bora, like most ultra-deepwater ships, is very new. This specific ship was built in 2010, and three of the five ultra-deepwater ships were built in 2010 or later. It's no coincidence that these newer ships are also going for higher rates than before.
I believe that this paradox between deepwater and ultra-deepwater can be explained by a few factors. The majority of discoveries over the last five years have occurred at ultra-deepwater depths. With so much of the shallow shelf already explored, producers must go to deeper and deeper depths to find new oil.
While the overall offshore rig market is indeed well-supplied, the situation is much better in the ultra-deepwater space. Those lessors with the most ultra-deepwater exposure should be able to best weather whatever weakness is ahead.
Who to pursue, who to avoid
The two biggest ultra-deepwater players are Transocean, with 36 ultra-deepwater drillships, and Seadrill, with 32. However, Transocean has a much larger fleet, with exposure to many depths. In fact, of Transocean's entire drillship fleet, only 46% is ultra-deepwater. Of the large rig lessors, Diamond Offshore has the lowest relative exposure to ultra-deepwater, with only about 30% of its drillship fleet in ultra-deepwater depths. If dayrates for midwater and deepwater are going to decline for a while, and it looks like they may, Transocean and Diamond will both be hit hard.
Many are worried about a decline in dayrates. The data for 2014, albeit limited, so far shows deepwater dayrates declining. However, the situation in ultra-deepwater drilling thus far seems much better. The prudent new investor should keep this dynamic in mind when looking to invest in an offshore lessor.
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