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3 Pressing Questions for Rig Companies in 2014

http://www.fool.com/investing/general/2014/01/17/3-pressing-questions-for-rig-companies-in-2014.aspx

Tyler Crowe
January 17, 2014

The offshore rig market has been a rather puzzling one over the past year or so. Despite the almost insatiable appetite for offshore rigs from Big Oil players and National Oil Companies like Saudi Aramco, the largest players in the space didn't even outperform the broader market on a total return basis.

SDRL Total Return Price Chart

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Many of the factors that affected rig companies in 2013 will remain the same, but some new challenges could also affect them this year. Let's take a look at three questions, the answers to which could have a deep impact on rig companies in the new year.

Source: Transocean Media Relations.

1. Will Seadrill (NYSE: SDRL) flood the market?
Seadrill is in the middle of a massive fleet expansion, and it brought 12 new rigs online in 2013. That was double next-closest competitor Transocean (NYSE: RIG), and it isn't showing any signs of slowing, with another 17 rigs slated to come online over the next two years.

One thing of concern, though, is that we could start to see a decline in activity. Nearly every member of Big Oil has said they plan to reduce capital expenditures over the next couple of years, which could result in a slowing of the market. If this were to happen, and Seadrill and others continue on these wild growth plans, then it's very possible we could see lots of excess rigs sitting in the docks. And no company wants to see their assets sitting onshore and not making money. 

2. Who will follow Noble (NYSE: NE) and start to turn over their fleets?
Back in September, Noble announced it would be spinning off its legacy -- aka, old -- and lower-specification fleet of rigs into its own entity some time this year. For Noble, which has one of the oldest fleets out there, this deal was necessary to get less productive assets off its books and get an injection of capital that will help fund any further development. By doing so, it's hoping to compete with the companies that have newer rig fleets, like Seadrill.

Noble isn't alone, though. Less than 20% of the floating fleets of Transocean and Diamond Offshore (NYSE: DO) are less than 20 years old. Also, Ensco (NYSE: ESV) and Hercules Offshore (NASDAQ: HERO) have jack-up fleets with an average age of 28 and 33 years, respectively. According to a recent Ensco presentation, over half of the worlds jack-up fleet and 36% of floating assets are reaching the end of their economic lives. With so many older assets sitting on balance sheets, don't be surprised if companies start to follow Noble's lead and make some drastic changes to their fleets. 

3. Who has contracts with questionable credit clients?
In the third quarter of last year, both Ensco and Diamond Offshore got bit by the bad credit bug. Two companies, Brazilian driller OGX and Canadian company Niko Resources, both defaulted on payments owed to Ensco and Diamond for contracts related to deepwater floating rigs. Not only did it cause a hit to both companies' earnings in that quarter, but Ensco and Diamond now need to get contracts for these assets. Diamond estimates it could take into the middle of 2014 before all four of these rigs find new contracts. 

Three companies facing a credit crunch that could hurt rig companies are Talisman Energy, EPL Oil & Gas, and Stone Energy</