Daily Archives: September 7, 2012
The stars are aligned for the success of the ultra-deepwater (UDW) drilling industry. As crude oil prices remain substantially high, oil exploration companies are going farther offshore to obtain new supply sources, supporting the demand for UDW drilling. At the same time, the cost of purchasing UDW drillships remains low, as shipbuilders clamor for any sort of construction orders (rigs and ships) because of the extreme downturn in the shipping industry.
UDW drilling refers to drilling beginning at water depths of more than 7,500 feet. Companies in this field contract out their UDW drilling rigs along with the necessary equipment and work crew on a daily rate basis to drill wells for customers. The nature of the business is very specialized, meaning that it is difficult for a new entrant to replicate the business model and attempt to muscle itself into the picture. Furthermore, the business model is fairly simple. Companies aim to profit from the difference between the daily rates that they charge their customers, and the daily operating expenditures (“OPEX”) that they incur while servicing drillships. So long as daily rates remain high and OPEX stays low, UDW drillers will make a tidy profit.
Fortunately for drillers, the demand and supply dynamics of the industry is in their favor. A typical drillship scheduled for delivery in 2015 can be purchased at around US$650 million, while the ongoing daily rate of a typical UDW drillship is around US$600,000. Assuming daily OPEX of US$200,000, a UDW drillship should bring in about US$400,000 daily. Considering these assets cost an average of US$650 million each and estimated useful lives of around 25-30 years, this spread between daily rates and OPEX could potentially generate US$730 million for the rig owner in five years.
Following the 2010 oil spill incident by BP in the Gulf of Mexico, increased regulation and greater scrutiny has limited the entrant of new UDW players. These policies entrench the incumbent UDW drillers and support the daily rate that companies can charge oil exploration companies such as ExxonMobil. At the same time, prices of new drillships remain low as the global shipbuilding industry goes through a deep cyclical trough. This means that shipbuilding houses are more likely to charge lower prices to obtain any business possible to make up for lost orders from the shipping sector.
Here are some of the drilling companies that have a higher proportion of exposure to UDW drilling and could potentially profit from the demand and supply imbalance in the industry. (Click here to access free, interactive tools to analyze these ideas.)
1. Ocean Rig UDW
ORIG is a pure play that allows one to invest in the deepwater water drilling market as it derives all of its revenue from that particular niche sector. 75% of its rigs are contracted into 2015, thus ensuring some kind of cash flow stability over the next three years. It has six high-spec UDW rigs on the water and three newbuilds scheduled for delivery in 2013. Of its six UDW rigs, it has two semi-submersibles that can drill up to 30,000 feet and four drillships that can drill up to 40,000 feet. Daily rates of all six ships are at least US$450,000, and up to US$675,000.
Furthermore, in August 2012, two of the newbuilds have already been contracted at daily rates of around US$640,000. However, a potential investor might be concerned that its assets are pledged as collateral to loans that are beginning to mature from September 2013 onward. For example, its two semi-submersibles Eirik Raude and Leiv Eiriksson are pledged to a US$1.04 billion revolver that is maturing in 2013.
2. Pacific Drilling (NAS: PACD)
Pacific Drilling derives 100% of its revenue from deepwater drilling. As such, it is one of the only two pure-play UDW drillers on the market. It has a fleet of six UDW drillships, with four delivered and two newbuilds to be delivered by 2013. It has the youngest fleet in the industry. Similar to Ocean Rig, it’s poised to profit from the upturn in deepwater daily rates and a lack of near-term supply of such expertise. The contract backlog for Pacific Drilling is at around US$2.2 billion and consists contracts ranging from one to five years. Two of the rigs operate in Nigeria, one in Brazil and another in the Gulf of Mexico.
One of the concerns about the company is that it has a fairly small fleet and has all its exposure to the deepwater drilling market. Should crude oil prices turn south for a considerable amount of time, the company might run into trouble.
3. Atwood Oceanics (NYS: ATW)
ATW is an international offshore drilling contracted founded in 1968. It currently derives 83% of its revenue from deepwater drilling and has eight rigs on the water, with five semi-submersibles and three jackups. It also has five newbuilds that are ready for delivery by 2014. Given its smaller size compared to the other players in the field, roughly 75% of its revenue is generated from its three largest customers: CVX Australia, Sarawak Shell, and Kosmos Energy Ghana.
The company is poised to take advantage of the upturn in the industry with most of its rigs contracted for a number of years. Its earliest rig repricing will come in December 2012, and this will allow it to have a chance of renewing the contract at a higher daily rate. Furthermore, the company has pretty low leverage compared to its peers with its debt to capital ratio at 26%, far lower than the industry average of around 35%.
4. SeaDrill Limited (NAS: SDRL)
Seadrill derives 66% of its revenue from deepwater drilling in FY2011 and has a mix of deepwater floaters, high-spec Jackups, and newbuilds. A huge advantage in investing in Seadrill is its aggressive dividend yield, which is currently at 9%. Its fleet consists of 66 offshore rigs, with 19 of them being newbuilds. It also has stakes in other offshore drilling companies such as Archer Limited (40%), SapuraKencana (6%), Varia Perdana (49%), Asia Offshore Drilling (34%), and Sevan Drilling ASA (29%). Its EBITDA margin and operating margin over the last two years has also been above those of its peers at 53% and 41%, respectively. However, similar to Ocean Rig, Seadrill has a tremendous amount of debt with its debt to capital ratio over 60%, while its peers are averaging around 35%. While in a rising daily rate environment Seadrill will do well with its leverage, it will suffer if and when the industry suffers a slowdown.
5. Noble Corp. (NYS: NE)
Noble Corp is a leading player in the offshore drilling industry with an existing fleet of close to 70 rigs. The fleet consists of nine drillships, 16 semi-submersibles and 43 jackups. In FY2011, it derived 61% of its revenue from deepwater drilling and will be a benefactor from the uptrend in daily rates of ultra deepwater drilling rigs.
In terms of geographical reach, Noble Corp is everywhere. It has 19 rigs in the Middle East, 12 rigs in Mexico, 10 rigs in Brazil, 10 rigs in the Gulf of Mexico, nine rigs in the North Sea, two rigs in the Mediterranean, one in Alaska, and five in other regions.
6. Transocean (NYS: RIG)
Transocean currently derives 59% of its revenue from the deepwater drilling sector. Unfortunately for the company, it was involved in the Macondo oil spill in the Gulf of Mexico in 2010. As a result, there is a lot of uncertainty surrounding the company. However, Transocean is definitely a force to be reckoned with in the offshore drilling market. It has the largest fleet of offshore rigs, with 130 rigs on water and five newbuilds. Furthermore, it has a large cash pile of close to US$4.0 billion and generates close to US$2.0 billion in cash from operations every year. This makes it a prime target to renew and upgrade its existing fleet of UDW rigs to take advantage of the latest uptrend in daily rates. Unfortunately, the Macondo event and its ensuing troubles will probably keep its share price depressed for the foreseeable future.
- South Korea: Samsung Yard Bags $ 600 Mln UDW Drillship Order (mb50.wordpress.com)
- Ultra Deepwater Drilling Poised to Take Advantage of Supply Demand Imbalance (fool.com)
- South Korea: Samsung Yard Bags $ 600 Mln UDW Drillship Order (appliedagrotech.net)
- Seadrill is Keeping the Lights on at Samsung Heavy with Seventh, and Eighth, New Drillship Order (gcaptain.com)
The U.S. shale boom has driven the cost of Gulf Coast light, sweet oil to its lowest level versus Brent crude in almost a quarter century as the nation’s dependence on foreign supplies wanes.
Light Louisiana Sweet, the benchmark grade for the Gulf Coast known as LLS, has traded on the spot market at an average of 15 cents a barrel more than Brent this year, the smallest premium since at least 1988, data compiled by Bloomberg show. The spread’s highest annual average was $4.02 in 2008.
The drop has cut costs for refiners in Texas and Louisiana accounting for 45 percent of U.S. capacity and replaced competing shipments from Africa. Gulf imports of light, sweet crude have fallen 56 percent since 2010, according to U.S. Energy Department data. A shale-oil influx from the Eagle Ford formation in Texas and Bakken in North Dakota and new ways to bring crude to the Gulf, such as this year’s reversal of the Seaway pipeline, may accelerate the shift.
“The market dynamics are changing,” Edward L. Morse, head of commodities research at Citigroup Global Markets in New York, said in a telephone interview. “When the Gulf Coast was a crude importer, they had to attract crude from elsewhere in the world, which meant LLS had to be at a premium to Brent. But now we’re moving into a totally different situation.”
Light Louisiana Sweet, a grade prized because its low- sulfur content and density make it easier to process into fuels such as gasoline, was 92 cents cheaper than Brent yesterday. It averaged 20 cents less than the benchmark in the third quarter.
Brent oil for October settlement rose 40 cents, or 0.4 percent, to $113.49 a barrel yesterday on the London-based ICE Futures Europe exchange. The contract advanced as much as 0.5 percent to $114.05 in trading today.
U.S. oil output surged to the highest level in 13 years in July, according to weekly Energy Department data. The U.S. met 83 percent of its energy demand from domestic sources in the first five months of this year and is heading for the highest annual level since 1991, department figures compiled by Bloomberg show.
“Unconventional oils and gas are changing everything about our competitiveness in the United States,” Bill Klesse, Valero Energy Corp.’s chief executive officer, said yesterday at the Barclays CEO Energy/Power Conference in New York. “Before you know it, we’re going to have so much light, sweet crude that in the U.S. Gulf Coast we’re not going to be importing light, sweet crude, and we think that happens next year.”
Houston, New Orleans and other ports along the Gulf Coast accepted about 554,000 barrels a day of light, sweet oil from outside the U.S. in June, down from 964,000 barrels a day in June 2011 and about 1.25 million in June 2010, according to the Energy Department’s Energy Information Administration.
The West African nations of Nigeria, Angola, Gabon and Equatorial Guinea accounted for 58 percent of the light, sweet crude imported into Gulf Coast ports in June 2012. North African nations accounted for a further 30 percent.
LLS will become about $5 a barrel cheaper than Brent during the next 12 months, David Pursell, a Houston-based managing director for Tudor, Pickering, Holt & Co., said in a telephone interview. The discount would take into account the extra cost of getting LLS to other customers, such as refiners on the East Coast, Pursell said.
Like oil in the Midcontinent, the relationship between LLS and Brent has been upended by surging shale production. West Texas Intermediate oil at Cushing, Oklahoma, the U.S. benchmark grade traded on the New York Mercantile Exchange, shifted to a discount to Brent almost two years ago after trading at a premium for decades.
Cushing inventories surged to 47.8 million barrels in June, the highest level since Energy Department records for the hub began in 2004. The WTI-Brent spread reached a record $27.88 in October. It was at $18.03 a barrel today.
“Over the last year and a half, with the WTI-Brent spread blowing out, the primary beneficiaries have been the Midcontinent players,” Cory Garcia, a Houston-based oil analyst for Raymond James & Associates, an arm of the financial-services company with almost $40 billion under management, said in a phone interview. “As LLS disconnects next year, the benefits to Gulf Coast refiners will be brought to the forefront.”
Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) reversed the flow of crude on the Seaway pipeline on May 19. The link, carrying as much as 150,000 barrels a day from Cushing to Gulf Coast refineries, is scheduled to pump as much as 400,000 barrels a day early next year.
- Report: Shale boom revamping U.S. refining industry (fuelfix.com)
- Gulf of Mexico production ramps up after Isaac (fuelfix.com)
InterMoor successfully replaced (8) spiral-strand platform wires on a permanent production facility in May 2011 without requiring a platform shutdown or loss of production. The operation was completed using a single Construction Anchor-Handling Vessel (CAHV) at a significant cost savings from the traditional method involving a derrick barge.
Each mooring line consisted of unjacketed spiral-strand wire at the fairlead, two sections of jacketed spiral strand in the water column and studless chain at the seafloor. Syntactic-foam submersible buoys had been installed at each spiral-strand wire connection, so each mooring line had two buoys.
Only the platform wires were to be replaced, and the remaining mooring components including the buoys were to be reused. Protecting the existing components from damage during recovery and reinstallation posed several unique challenges. One of the main operational challenges was to design a way to bring the upper buoy and platform wire out of the water and secure them on deck so that the old platform wire could be disconnected. To accomplish this, InterMoor designed and installed a custom hang-off porch at the CAHV’s stern. The porch used a combination of pneumatic and hydraulic cylinders to manipulate and align the entire porch as each buoy connection was recovered and deployed. The porch also had separate stoppers for the socket connections and a removable cradle for the buoy. Another operational challenge was the unknown condition of the buoys themselves, particularly since they were to be reused on the replacement wires. There was no industry experience at the time in retrieving foam buoys that had remained submerged at depth for over a decade. This paper will explore these challenges and others in more detail as well as the steps that were taken to successfully overcome them.
Offshore oil and gas operators in the Gulf of Mexico continue to restore production following Tropical Storm Isaac. The Bureau of Safety and Environmental Enforcement (BSEE) Hurricane Response Team will continue to work with offshore operators and other state and federal agencies until operations return to normal.
Personnel remain evacuated on a total of 10 production platforms, equivalent to 1.68 percent of the 596 manned platforms in the Gulf of Mexico. Production platforms are the structures located offshore from which oil and natural gas are produced.
Personnel remain evacuated from one rig, equivalent to 1.32 percent of the 76 rigs currently operating in the Gulf. Rigs can include several types of self-contained offshore drilling facilities including jackup rigs, submersibles and semisubmersibles.
- Gulf of Mexico production ramps up after Isaac (fuelfix.com)
- Gulf Oil Production About 80% Shut-In Due to TS/Hurricane Isaac (247wallst.com)
- Hurricane Isaac’s Impact On Oil Prices Would Likely be Short-term (valuewalk.com)
- Steffy: Tapping oil reserve a matter of smoke and mirrors (fuelfix.com)
- The Strategic Petroleum Reserve and Oil Prices (ritholtz.com)
- White House studying potential oil reserve release (reuters.com)
- White House says tapping oil reserve is ‘on the table,’ as gas prices rise (foxnews.com)