The outlook for the domestic deepwater drilling market is as murky as ever. Excluding water injection wells and other activities that weren't banned under the five-month moratorium, not a single new drilling permit has been issued. Comments by BOEMRE Director Michael Bromwich following a speech he delivered last week suggest that no permits are imminent. It could be weeks, or it could be months. No one seems to know.
Given this backdrop, you might be surprised to see the shares of offshore drillers like Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO) rising strongly this month. However, the move is less of a surprise when you consider the global offshore drilling market, which looks quite a bit better than the situation here at home.
The proof is in the new rig orders.
Late last year, we saw a flurry of orders from the likes of Pride International (NYSE: PDE), Seadrill (NYSE: SDRL), and DryShips (Nasdaq: DRYS) for newbuild deepwater rigs. The trend has continued in the early weeks of 2011. First, Diamond Offshore ordered up a new drillship expected to arrive in the first half of 2013. Now Noble (NYSE: NE) has joined in with a two-rig order from the same ship builder, Hyundai Heavy Industries.
This latest round of rigs is running around $600 million a pop. That's well off the highs of a few years ago, when newbuild orders by the likes of Atwood Oceanics (NYSE: ATW) ran over $750 million. Dayrates have come down, so the lower shipyard costs are a big help in preserving the economics of ordering these behemoths.
Consider Noble's recent letter of intent with Royal Dutch Shell for a 5.5-year contract on one of these newbuilds for $410,000 per day, plus a 15% performance bonus. Let's split the difference and say Noble pulls in a dayrate of $440,000 across the contract period. That's $883 million of revenue. At a 70% margin, Noble should earn roughly $618 million, covering the cost of the rig. For two decades or more following the end of the Shell engagement, this drillship will be a free cash flow machine.
Having deepwater rigs sitting idle in the Gulf right now is no fun. Marathon Oil recently made headlines by canceling a four-year, $752 million drilling contract with Noble in the Gulf. Fortunately for this driller and its peers, there are ample opportunities to put high-end rigs to work in the world's other great deepwater basins.
