In the world of ultra-deepwater drilling, new high-spec rigs or drillships are usually considered the best for the job. Indeed, with oil becoming harder and harder to find and drillers looking deeper and deeper for oil reserves, the most high-tech equipment is needed, and Seadrill (NYSE:SDRL) is rising to that challenge.
Seadrill was one of the few offshore drillers to recognize the rising demand for UDW high-spec drillships early, and the company has been investing heavily in its fleet during the past few years. In particular, as of July this year the company's construction program totaled 22 units, including nine drillships, two harsh environment semi-submersibles, and 11 high specification jack-ups. In addition the company has fixed priced options for two additional UDW units.
You may think this construction drive is overdoing it, but Seadrill is right to invest. You see, since Seadrill was established back in 2005, 261 new drilling units have entered the offshore drilling market,and since 2005, despite the influx of units to the market, the utilization rate of these drilling units has been a consistent 100%. What's more, UDW oil production is expected to expand from 1 million barrels per day currently, to 5 million over the next few years. This is the reasoning behind Seadrill's drive for new drilling units. If the numbers are right Seadrill stands to make a killing.
There are other factors working in Seadrill's favor, and one of them is the aging drillship or floater fleets of its peers. For example, according to some information, around 49% of the current global floater fleet is over 20 years old. Moreover, according to Seadrill's management, a strong trend is now emerging within the industry where fourth or fifth (older) generation vessels are incapable of meeting oil companies' drilling demands and safety requirements and are thus being retired.
Unfortunately, Transocean's (NYSE:RIG) fleet is, for the most part, over a decade old. A quick flick through its fleet list and you can see that many units are even over two and a half decades old. While this has not been a concern before, with competitors like Seadrill now ramping up production of new vessels, Transocean is going to be facing increasing competition from peers with newer fleets, which are able to drill faster, deeper, and in harsher environments. That said, Transocean does have seven new UDW floaters under construction, but is this too little too late?
Too little too late?
According to data from 2011, Transocean's fleet had an average age of 21 years, while Seadrill had an average age of five years, and peer ENSCO's (NYSE:ESV) fleet was an average of 11.5 years old. While this data is out of date, it's still a good representation of the age distribution of these fleets. Additionally, it would appear that this age distribution is not going to realign itself anytime soon. For example, while Seadrill has 22 new units under construction, Ensco has eight for delivery within the next two years, and Transocean, as I have already mentioned, only has seven new units earmarked for delivery within the next few years.
Looking at the figures it is easy to see why Transocean has underperformed its peers recently. The company has one of the lowest gross margins within the group, and many analysts are now speculating that this is due to its aging fleet. This makes sense as an older fleet would require more and more attention and costly maintenance to keep it functioning and 'in the game.' In particular, Transocean's gross margin during its second fiscal quarter for this year was a hair under 40%; for the first half of this year the margin came in at 38%.
Seadrill, on the other hand, reported a gross margin of 57% for the second fiscal quarter and a similar margin for the first half as a whole. In addition, Ensco's gross margin was similar, at 51% for the second quarter and a tad under 50% for the first half of the year.
So, the difference in fleet ages and the impact that this has on the company's profitability is quite pronounced.
Overall there is a significant amount of evidence to suggest that Transocean's ageing fleet is holding the company back. In particular its peers with newer fleets are reporting wider profit margins and are well placed to meet the growing demand for UDW high-spec drilling units needed around the world.
With this in mind, perhaps it is time to give up on Transocean in favor of one its peers with a newer, more lucrative fleet.