Image: Transocean Drillship Discoverer Inspiration <\/p>\n
Note: All the data used for my charts are from InfieldsRig.com <\/p>\n
Investment Thesis <\/p>\n
The offshore drilling industry plays an important role in the oil and gas supply chain; no one can deny this basic principle. Did you know that oil production from offshore locations represented about 29% of the global crude oil production in 2015, according to the EIA? This percentage has been nearly constant since 2005. <\/p>\n<\/p>\n
The main locations are in Saudi Arabia, Brazil, Mexico, Norway\/UK and the USA and represent a total of approximately 27 million BOE\/d. <\/p>\n<\/p>\n
The bulk of the crude production is still in the \"shallow waters,\" which are generally cheaper and less technically challenging when compared to other offshore segments. <\/p>\n
\"Shallow waters\" require a rig less expensive anchored to the rock floor, called a jack-up. This category can be classified into four sub-categories: <\/p>\n
However, the move toward \"deep waters\" and \"ultra-deepwaters\" projects is clear the past 5 to 10 years, and has required other types of rigs. <\/p>\n
Exploratory drilling in \"deep waters\" and \"ultra-deep waters\" is naturally more costly and complex for oil majors, but technology advancements and the near exhaustion of shallower prospects left no choice to the oil majors who are turning increasingly to the deeper waters, particularly in Brazil, West Africa and in the Gulf of Mexico. <\/p>\n
The rigs required to drill in the \"deep waters\" segment are called floaters or mainly Drillships or Semi-submersibles. The cost of building such a rig stands in the range of $600 million to over $900 million. <\/p>\n
Construction Costs estimated, indicated by Transocean (NYSE:RIG) for the five UDW are: <\/p>\n
Semi-submersibles and Drillships can be classified under three sub-categories: <\/p>\n
The day rate paid by oil majors depends on the rig specifications, and also the location and duration of the work. The range in day rate can be from $45k\/d to as high as $450k\/d or more. Day rates have been going down the past three years, due to the crash in oil prices and rig oversupply. <\/p>\n
IHS Markit for May 2017 indicates a record low: <\/p>\n
Graph overview of the Offshore fleet status Worldwide, as of June 12, 2017 compared to April 8, 2017. <\/p>\n
The total rigs stands at 844 as of June 12, according to InfieldRigs (excluding 135 rigs under-construction). The number of rigs actually contracted is 436, which represents 51.7% of the total rigs (Up from 50% in April). <\/p>\n
Below are the number per categories. <\/p>\n
Global charts study of the Offshore drilling fleet (click graph to enlarge): <\/p>\n<\/p>\n<\/p>\n
The total rigs including the \"under construction\" is now 979. <\/p>\n
436 rigs are actually classified as \"operational\". Below is the detail per segment: <\/p>\n<\/p>\n
Details per category: Drillships, Semisubs, Jack-ups and tenders. <\/p>\n<\/p>\n<\/p>\n
Conclusion: <\/p>\n
Looking at the Offshore drilling fleet, the numbers confirm that we are still in a serious oversupply situation but signs of balancing start to show up in specific locations. <\/p>\n
Utilization which is the percentage of rigs actually working compared to the total rigs in the market -- excluding under-construction -- is 51.7%, which is low and slightly better than in April. <\/p>\n
See detail per class below: <\/p>\n<\/p>\n
The Semi-Submersible segment is the more affected with a utilization rate of 36.1% only, and the jack-up segment is doing better with 57.7%. <\/p>\n
One interesting development is the North Sea deepwater location that is now facing a shortage of HE rigs according to Bassoe Offshore: <\/p>\n
Harsh-environment rigs compliant with its strict operating standards as demand rises for premium units to carry out an increasing pipeline of drilling work while older rigs are set to be scrapped, according to vessel broker Bassoe Offshore. <\/p>\n
The midwater harsh-environment segment is seen as ripe for recovery despite a market slump caused by a lack of demand from oil companies due to low oil prices... <\/p>\n
This quick analysis explains why companies such as Noble (NYSE:NE), Ensco (NYSE:ESV) and Rowan Companies (NYSE:RDC) may have a slight advantage in this market, compared to pure floater players such as Atwood (NYSE:ATW), Diamond Offshore (NYSE:DO) or even Transocean (NYSE:RIG). <\/p>\n
Jack-up utilization is rising slightly in the jack-up market whereas floater utilization is still shrinking. However, higher utilization for the jack-up group is not translating to a better outlook for day rates which are still below the breakeven level in some cases. <\/p>\n
My recent article about the last ONGC tenders for 3 floaters is a good reminder. Please click here to read it. <\/p>\n
It also provides an explanation as to why the \"distressed\" rig market focuses now primarily on the jack-ups. The jack-up segment has been more active recently with a number of acquisitions from newly created companies such as Borr drilling (acquisition of Hercules Triumph and Hercules Resilience and acquisition of the entire Jack-up fleet from Transocean) or Northern Drilling, created by John Fredriksen in relation with Seadrill (NYSE:SDRL), and acquisition of the semisub West Mira. <\/p>\n
The semi-submersible group is also an opportunity for a different reason. While the jack-up group is experiencing some new activities, the floaters market - particularly the semi-submersible market - is, conversely, still battling a terrible downturn. This is probably because the deepwater projects have a longer time length with a large initial cost, and oil majors are still reluctant to commit large amount of cash in exploration capex, especially with oil prices now below $50 a barrel. <\/p>\n
Unfortunately, the recent wave of bankruptcies and reorganizations that the offshore drilling industry is now facing will not solve the rig oversupply problem and perhaps may aggravate and prolong the struggling battle by adding more competition and misery. <\/p>\n
After Hercules offshore we have now Paragon Offshore (OTCPK:PGNPQ), Ocean Rig UDW (NASDAQ:ORIG) and soon SDRL\/NADL and probably Pacific Drilling (NYSE:PACD). <\/p>\n
A new trend may have started recently with Ensco (NYSE:ESV) acquiring Atwood Oceanics (NYSE:ATW) in a all-stock merger. Please click here to read my article. <\/p>\n
As I have explained in another article, bankruptcy is not the end of the road but, in fact, it is the beginning of the new one and an increase in competition. <\/p>\n
Finally, I am totally convinced that the offshore drilling industry will emerge from this downturn as it has always. Investors and traders will have to analyze the fundamental seriously to eventually pick the right time for investing in this sector (versus trading the sector). <\/p>\n
I do not see it immediately, but I believe the sector will bounce back in about 12 to 18 months (depending on the oil prices, of course). This situation will affect the market and it will create some sharp volatility for the next 8 months, which is appealing to traders. <\/p>\n
Important note: Do not forget to follow me on the offshore industry. Thank you for your support. <\/p>\n
Disclosure: I am\/we are long RIG, ESV. <\/p>\n
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. <\/p>\n
Additional disclosure: I am actually trading and day trading the sector exclusively for the last two years. I trade most of the stocks indicated in my article, but still hold a few long positions. <\/p>\n
Editor's Note: This article covers one or more stocks trading at less than $1 per share and\/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. <\/p>\n
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Read the rest here: <\/p>\n
Offshore Drilling - All You Need To Know About A Shrinking Fleet, As Of June 12, 2017 - Seeking Alpha<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Image: Transocean Drillship Discoverer Inspiration Note: All the data used for my charts are from InfieldsRig.com Investment Thesis The offshore drilling industry plays an important role in the oil and gas supply chain; no one can deny this basic principle. Did you know that oil production from offshore locations represented about 29% of the global crude oil production in 2015, according to the EIA? This percentage has been nearly constant since 2005. Continue reading