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
The proof is in the new rig orders.
Late last year, we saw a flurry of orders from the likes of Pride International
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
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.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profileor follow his articles using Twitteror RSS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool owns shares of Noble and Transocean. The Motley Fool has a disclosure policy.
More from The Motley Fool
3 Top Oil Stocks to Buy in December
Oil prices are up, but oil stocks aren't. That's why investors should take a look at Diamondback Energy, ExxonMobil, and Transocean.
Transocean Takes Another Big Writedown to Make Way for Its Acquisition
For the second quarter in a row, Transocean elected to take a huge hit to its income statement to prepare for the next phase of the offshore drilling market.
Why Transocean Should Be on Your Watch List
If you’re at all bullish on recovery in the offshore oil industry, Transocean should be at the top of your watch list.