Drillers Bullish on Future Prospects

Jim Brown
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When businesses put their money on the line rather than just predicting future business trends is says a lot about the future of the sector.

Drilling companies have placed more than $5.0 billion in orders for new rigs since the start of October. At least 17 new rigs have been ordered and that is a huge boost to sentiment for the sector. Drillers are ordering high specification rigs able to drilling deeper water and under harsher conditions. Considering almost every driller stacked some rigs over the last six months it suggests they are expecting business not only to improve but improve strongly.

The flurry of orders put an end to a nearly two year dry spell for rig builders. Other than Petrobras there have been very few orders for new rigs and the activity has been mainly in purchasing used rigs from companies no longer interested in drilling offshore.

Of the 17 orders so far this quarter the jackup rig builders saw orders for 13. A jackup rig has legs that extend down to the bottom and the biggest rigs can drill in water up to 400 feet deep. There had only been eight jackups ordered in the two years prior to September 30th. Analysts cited a 20% drop in construction costs because of low demand and slack in the shipyards that build these rigs. That is even more amazing when you consider steel has gone up significantly over the last two years.

The current high specification jackup rigs have more space for supplies and carry much more pipe for deeper wells and horizontal wells, which demand more torque. The global jackup fleet has 466 rigs and 338 of those were built before 1990 according to Tudor Pickering Holt * Co.

TPH claims the older rigs are losing jobs to the newer class of rigs because of the need for more power to go deeper. Recent discoveries just offshore in the gulf in less than 100 feet of water have seen well depths of more than 30,000 feet. At that depth they encounter higher pressures and need heavier equipment to drill it safely.

Atwood Oceanics (ATW) has ordered two high specification jackups at $190 million each and took options to buy three more. Atwood must be feeling the upgrade pain because they just idled three of their older rigs for lack of work. The Atwood CEO said they did not see any attractive prospects for those older rigs in the next twelve months. The new rigs will command higher day rates of $120,000 to $150,000 when delivered in 2012.

Houston startup Prospector Offshore Drilling also ordered a couple of jackup rigs. With six employees they now have one rig for every three employees.

Last week Transocean Offshore (RIG) also ordered a $195 million jackup from a Singapore builder.

Last week SeaDrill (SDRL) ordered two shallow water rigs at a combined cost of $380 million. This is in addition to the two $200 million rigs it ordered in October. SeaDrill also ordered two deepwater drillships at $600 million each.

Not to be outdone DryShips (DRYS) signed a deal with a Korean yard to build up to four deepwater rigs at $600 million each.

Wells Fargo Securities said Petrobras (PBR) is on track to finalize orders by year-end for nine deepwater rigs out of the 28 they are planning on building over the next couple of years. WFS also said China and India are planning on releasing new orders soon.

WFS also expects Ensco (ESV) and Noble (NE) to order new gear soon because of the dwindling pool of used gear available in the marketplace.

All that current activity totals more than $5 billion plus another $5 billion by year-end if Petrobras releases those orders for nine new rigs. The people who will supply the equipment for the rigs have got to be running in circles with all the activity. National Oilwell Varco (NOV) is the preferred vendor for the Petrobras deal and Cameron (CAM) should get all the orders for the blow out preventers. I heard last week there is a 12-18 month lead time on new BOPs that fit the new government drilling requirements. Cameron can ask any price they want at this point so their 2011 earnings should be very good.

Jim Brown

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