Recent Events in Brazil and Rig Sale Make for Interesting Times for Offshore Drillers

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Recent events in Brazil and a distressed rig sale have provided some interesting insights into the current market environment for offshore drillers. During the past year in Brazil, there have been shipyard and customs strikes as well as regulatory delays in obtaining the needed approvals to start work. These issues are separate from the well publicized issues with Chevron CVX and Transocean RIG and their involvement in the Frade field oil spill. Furthermore, we’ve recently seen the sale of an ultra-deep-water rig by a struggling new industry player at a modest discount to newbuild rates of around $625 million to $650 million and Petrobras PBR cancel the process to contract five rigs from another new entrant to the industry called Ocean Rig.

For example, Noble NE has nine rigs in Brazil and has suffered through longer-than-expected shipyard stays as a result in the past year. Furthermore, Noble also has been hurt by Petrobras’ inability to supply Noble’s rigs with enough supply boats, helicopters, and dock space for their boats, which has caused further operational disruptions and additional downtime for Noble. Fortunately, Noble has largely wrapped up its needed rig maintenance, and Petrobras’ plans to drop six to 10 midwater rigs in 2013 frees up additional logistical capacity to service Noble’s rigs, which are all higher-spec rigs. Eventually, if Petrobras wants to continue to attract higher-specification rigs, it may need to offer up better contractual terms to the major drillers.

However, Petrobras’ plans to drop the midwater rigs creates long-term challenges for Diamond Offshore DO . In short, deepwater rigs, particularly dynamically positioned ones, provide operators with a lot more flexibility regarding the water depths they can drill. Furthermore, as moored rigs pose problems for more developed fields with substantial amounts of subsea infrastructure, Petrobras is likely to prefer more advanced dynamically positioned rigs over time. Diamond is particularly exposed to this issue, as only four of the 12 rigs it is currently operating in Brazil are dynamically positioned. As Petrobras moves toward obtaining more dynamically positioned rigs for its needs, Diamond’s rigs eventually may be forced out of the market into less attractive markets with lower returns.

Another intriguing event was Songa Offshore’s sale of the Songa Eclipse to Seadrill SDRL for $590 million. The small drilling contractor has run into cost overruns totaling more than $300 million on a pair of rig upgrades. As the firm is highly leveraged with more than $1 billion in debt, the Eclipse sale was needed to reduce its debt levels as it was reportedly in breach of covenants. Furthermore, Songa has a four-rig deal with Statoil STO for some unique rigs designed for work in Norway called Cat-D rigs. Statoil has committed to contracts for the four rigs worth just more than $5 billion across eight years.

However, Songa still needs to find a way to pay for the rigs’ construction with construction commitments of $2.5 billion during the next three years. Therefore, the Cat-D rigs also may be up for sale. Given the rigs’ unusual capabilities, they also may be attractive acquisition candidates for the major offshore drillers we cover, though the contracted day rates at $430,000 may be a bit low. However, if a driller can negotiate a large enough discount on the purchase price, we think the returns certainly could be quite respectable. We think Songa’s struggles speak to the value that the major offshore drillers bring to the table in terms of being able to successfully obtain financing for their under-construction rigs and not place their customers’ drilling programs and production goals at risk.

 

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