In the deepwater kingdom, the driller with a contract in hand is king. That's why, even with crude oil prices pushing up against all-time highs, investors were perhaps a bit nervous to see GlobalSantaFe
Availability of deepwater semisubmersibles and drillships is extremely limited through 2009, enough so that major operators like BP
Whatever the reason, GlobalSantaFe was unable to secure a commitment from an upstream explorer this time around. Because it's confident about the ongoing strength of the deepwater exploration market, GlobalSantaFe is laying out roughly $740 million for a shiny new drillship. This will be an enhanced version of two older ships that are presently working for BHP Billiton
Longtime Fools may recall that one of GlobalSantaFe's predecessor companies was leading the spec build charge back in 2001. But that was a different company, and a different time. Santa Fe International had no debt, a pile of cash, and shipyard costs that were a fraction of what they are today. In hindsight, the decision to build counter-cyclically, and on spec, was a sound one. The old argument against peak-cycle spec building has not been rendered altogether quaint.
I don't intend to sound alarmist. Based on leading dayrates and strong bidding interest in recent lease sales, the odds are extremely high that GlobalSantaFe will land a full payout contract before the new drillship is delivered in 2010. Nevertheless, it's an aggressive move, mirroring the likes of swashbuckling Seadrill. Another firm, Ensco International
I'll leave you with this quote from Bob Rose, GlobalSantaFe's chairman, from 2001:
When you are in a capital intensive, cyclical business, the most important decisions you make are your capital decisions. When you are committing hundreds of millions of dollars, you better be sure you are going to get a return on it. The best way to ensure that return is to have somebody contract to use it before you build it.