If you have ever looked at companies like Transocean (NYSE:RIG) or Seadrill (NYSE:SDRL), your first reaction was probably, "Holy schnikes! This company has a huge dividend, I should buy shares." Then, your second reaction is, "Wait, I have no idea what rig companies are all about, maybe I should stay away until I know more." Well, here is the nice thing: Rig companies are not the complicated businesses their name might suggest. There are, of course, the basics such as income statements and balance sheets, but there are some other very important factors that you should consider when investing in these types of companies. To help you break down the business of offshore rig companies, here is a primer on what these companies are and what you should look for when analyzing them.
What are we talking about?
Calling a business an offshore-rig company makes it sound complex, so let's simplify it. These hulking structures drill for oil and gas miles offshore in places we can't even fathom is possible, but the rig company itself has almost nothing to do with drilling operations. Think of rig companies as equipment renters, it's just that they rent that equipment out for what can be years at a time and for hundreds of thousands of dollars a day.
Offshore is a pretty broad term that can mean drilling for oil or gas in 10 or 10,000 feet of water. Since there is so much diversity in the industry, there are different types of rigs. Here are how they are generally classified:
- Platform rig: A platform constructed on the seafloor supports the rig. They are better suited if several wells will be drilled from a single location.
- Jackup rig: A rig that can float into place and has a built-in legs that can "jack" the structure out of the water. These rigs can only be used in shallow depths --350 feet -- but are very popular because they are stable.
- Floaters: Rigs that can drill while not being anchored to the subsurface. There are two basic types: Drillships are much more mobile and are ideal for exploration while semisubmersibles are more stable and are better for oilfield development. Floaters are also segmented into water depths: midwater (less than 4,500 feet), deepwater (less than 7,500 feet), and ultradeepwater (greater than 7,500 feet)
A general rule of thumb is that the deeper water in which the rig can drill, the more money you can charge for it. So as an investor it is good to know what types of rigs a company has. There are over 100 companies that own and lease out rigs, but there are a dozen or so we can invest in on the major American exchanges.
Who are the players?
We can basically break up those players into two groups: the diversified ones and the niche market players. The diversified players have a wide variety of rigs that can handle drilling in almost anywhere. Here are each of them and the breakdown of the types of rigs they have in their fleets:
|Company||Platform Rigs||Jackup Rigs||Midwater Floaters||Deepwater Floaters||Ultra-Deepwater Floaters||Support Vessels|
|Diamond Offshore (NYSE:DO)||0||7||14||7||12||0|
|Atwood Oceanics (NYSE:ATW)||0||5||2||3||6||0|
|Vantage Drilling (UNKNOWN:VTG.DL)||0||4||0||0||4||0|
The niche players, on the other hand, focus more on one single aspect. While there are more than on this list, these are the most prominent ones:
- Hercules Offshore (UNKNOWN:HERO.DL): A large fleet of jackup rigs and liftboats (support vessels). A very large portion of fleet is dedicated to the Gulf of Mexico.
- North Atlantic Drilling (NYSE:NADL): A recently IPO'd subsidiary of Seadrill that only owns rigs designed for harsh environments, such as the North Sea off the coast of Norway and in the Arctic.
- Rowan (NYSE:RDC): For years it was mostly a harsh-environment jackup-rig company, but it has recently purchased an ultradeepwater rig and has three more under construction.
- Pacific Drilling (NYSE:PACD) and Ocean Rig UDW (NASDAQ:ORIG) are two companies that focus exclusively on serving the ultradeepwater market with new, high-specification rigs.
The 5 focal points for your research
For rig companies, there is one document that is just as important as its financial statements: Its fleet status report. Every company produces one, and it gives loads of details such as what each rig is capable of, which ones are on the job, how much they are earning per day, who is paying for the work, and when that contract is set to expire. When looking at this document, there are basically five things that you should look for in no particular order. To help get a jump-start on your research, here is some of the data from the fleet status reports of the companies mentioned.
Fleet Age: Let's say there are a bunch of rental-equipment businesses for sale in your town and you can buy one, which do you pick? The one with all the fancy new equipment that has the most advanced safety specs, can handle a wider array of jobs, and get a premium on the market price? Or the one with a bunch of equipment from the 1970's that gets the job done, but can has a tendency to need more maintenance? This is the same premise for rig companies. Younger fleets generally are priced at a premium and generally need less time at the docks for maintenance. In fact, most newer, higher specification rigs built for the ultradeepwater environment are even taking market share from older rigs that can only handle deepwater or midwater jobs. As drilling for new oil sources become more complex, companies that rent equipment want the best technology available and are willing to pay for it. You will notice that the fleet age has a lot to do with the other factors below.
This table is a breakdown of the age of each companies rig fleet for both floating and stationary rigs, as well as the percentage of the fleet that is less than 10 years old:
|Company||Average age of stationary fleet (Jackups and Platforms) (in years)||% of stationary fleet less than 10 years||Average age of floating fleet (in years)||% of floater fleet less than 10 years|
|North Atlantic Drilling||11.6||66%||
N/A (under construction)
There are several nuances among these numbers. For example, all of Ensco's ultradeepwater-class rigs are less than five years old. So while it is worth looking deeper into these figures, these should at least give you a jumping off point.
Dayrates: This is the industry term for price. As you can imagine, both the fleet age and specifications for the rig will be a large determining factor in the price that a company can get for its rigs. You may notice, the companies with a higher proportion of ultradeepwater rigs, harsh environment rated jackups, and younger fleets command much higher rates than others with older, less capable rigs.
|Company||Average Dayrate of Stationary fleet||Average Dayrate of Floating Fleet|
|North Atlantic Drilling||$340,333||
Utilization rate: Offshore oil and gas exploration is going like gangbusters today, but that doesn't necessarily mean that every company's fleets will be in operation all the time. Things like maintenance and waiting to secure a new contract can mean that rigs aren't making money, which means they are inflicting costs. To determine how much of the fleet is actually making money, you need to look at the utilization rate. Again, you will notice that those companies with newer, more capable rigs have much better utilization rates.
|Company||Utilization Rate of Stationary fleet||Utilization Rate of Floating Fleet|
|North Atlantic Drilling||100%||
Contract backlog: If a rig has a contract in place for that rig after the current ones expire, most likely the company will tell you in the fleet-status report. Total contract backlogs for companies are measure in fleet years, which is the cumulative length of every current and future contract. When looking at contracts, here are two important things you should look for:
- Duration of current contract: The duration of the current contract is important to consider in relation to the overall market. For example, many analysts are pointing to a down market for demand in rigs, so long contracts are en vogue today. If the market is picking up and demand is very high, then a shorter length contract may be a good thing because then a company can negotiate for a higher dayrate.
- The next contract, if in place: If a company is showing the next contract on the books, look at the new terms. Is it more or less than the current contract? How long is it?
Credit health of customers: If you are going to rent out a piece of equipment that will cost tens of millions of dollars over the length of the contract, you had better be sure that the company will be able to pay for it. This past year, we actually saw this problem rear its head for both Diamond Offshore and Ensco when two exploration companies, OGX and Niko Resources, defaulted on their payments, and it has left a couple rigs for each company without contracts for several months.
One way that investors can spot these kinds of red flags is to look at the credit health of those companies renting the rigs. Rig Status reports will normally disclose the operator of that rig. You probably don't need to look at the credit health of every company. Big Oil companies like ExxonMobil and Chevron, as well as state run companies like Saudi Aramco and Petronas, are pretty safe, stable customers. If you are unfamiliar with the name of a client, though, it may be worth looking into.
What a Fool believes
Just like every other group of companies in the oil and gas space, rig companies are cyclical and depend greatly on whether exploration companies are spending money or not. But there are a select few companies in this space that are better suited to handle these down times than others, and being able to identify those great companies will make for a much better investment. Following these general guidelines, as well as taking a look at the financials, should help you make a better decision about which rig company will fit best in your portfolio.