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Anticipating a recovery in the offshore rig market

Wed 30 Jan 2019 by John Snyder

Anticipating a recovery in the offshore rig market
Terry Childs (Westwood Global Energy Group): “The wheels for the recovery are in motion”

Has the offshore drilling rig market turned the corner? Well, the wheels are in motion, but we are not quite there yet, according to Westwood Global Energy Group

Aberdeen-headquartered Westwood believes as 2019 progresses utilisation and day rate increases will come, but it will happen later rather than sooner. In the meantime, the company expects market momentum will hopefully continue to build, with visible signs of wholesale improvement emerging in the second-half of the year.

In its 2018 Global Offshore Rig Market Recap, Westwood reports that its Riglogix data show that 19 rigs were delivered in 2018, comprised of 15 jack-ups and four semisubmersibles (semis). As of December 31, there were still 112 rigs listed as under construction, including 75 jack-ups, nine semis, 21 drill ships, and seven tender-assist units. Construction on the majority of these units is essentially completed and waiting on acceptance from the rig owners.

Westwood head of Riglogix Terry Childs noted that 75 rigs have 2019 delivery dates attached to them, “However, those dates will continue moving right as the year progresses”, because rig owners will not take delivery of a newbuild rig without work in place for it. Mr Childs expects four drill ships might be delivered this year and all four would be rigs purchased from shipyards by existing rig owners and deployed to work, assuming work can be secured.

As for the jack-up market, Mr Childs said one ENSCO unit that will go to the North Sea will be delivered, “Outside of that one, if I had to guess, I would say maybe five to 10 others may find their way into the fleet,” he said, adding “Borr Drilling will take two to three into the fleet, as they have secured contracts for four jack-ups off West Africa with yet to be named units, but some of those will be newbuilds.”

Lastly, Mr Childs said there are only five semi-submersibles with 2019 delivery dates attached to them, and he did not anticipate more than two of those coming into the fleet this year.

"Since the downturn began in September 2014, there have been 212 units taken out of service through retirements, conversion to other modes, and total-loss accidents"

The downturn has also led to the removal of older-generation rigs, with last year hitting an all-time high of 57 removed from the fleet, including 37 jack-ups, 14 semis, and six drill ships. Westwood reports that since the downturn began in September 2014, there have been 212 units taken out of service through retirements, conversion to other modes, and total-loss accidents.

Another good sign is that jack-up and drillship utilisation rates rose during 2018. However, gains made in semi utilisation during the first half of the year were erased in the final six months as utilisation fell by some 14%, from 54.7% in June to just over 40% in December.

A KFELS B class jack-up rig can operate in water depths up to 400 feet. This one, Ariel, was built for SeaDrill Limited in 2008

M&A activity

During 2018, a number of mergers and acquisitions among rig owners were either announced or completed. Publicly traded Borr Drilling purchased Paragon Offshore and there were 24 jack-ups removed from the fleet. Borr went on to purchase a total of nine newbuild jack-ups from Singapore’s Jurong Shipyard and KeppelFELS and began taking delivery of the rigs in 2018; those deliveries stretch until Q4 2020.

Transocean purchased Songa Offshore’s floating rig fleet and followed that up with a purchase of Ocean Rig towards the end of the year. ENSCO and Rowan also announced a merger that will be completed this year.

In terms of day rates, only two regions experienced noticeable gains in 2018, according to Westwood: one was the harsh-environment semi fleet in the Norwegian North Sea which began 2018 with rate fixtures of under US$200,000, but surging rig demand ultimately pushed rates into the US$290,000-US$300,000 range, a staggering increase in a fairly short amount of time. Mr Childs said he expected rates to remain strong for the year.

The other day rate winner was in the US Gulf of Mexico (GoM), where consistent 100% utilisation of the 12-rig jack-up fleet pushed day rates for some long-legged units up by US$20,000, or more (less for smaller rigs), to as high as US$85,000. One new deal attracted a rate of US$95,000, but that was for a specific purpose where only one unit met the required specification. In the rest of the world, rates throughout 2018 were essentially static, as rig supply continued to substantially exceed demand.

"In a recovering market, rig owners will try to run rates up as quickly as possible, and this time will be no different"

There will be one jack-up leaving the GoM, heading to Trinidad within the next few weeks, according to Mr Childs, who said that while additional units may be brought along, he had no concrete details at present.

One of the year’s big headline grabbers was the Chevron/Transocean fixture for the US GoM. One of Transocean’s two newbuild ultra-deepwater drill ships will now be outfitted with, among other features, the world’s first 20,000 psi blow out preventer (BOP) system. The deal came in at a day rate of roughly US$454,000, well above market rates, but had the contract been signed during the peak period in 2011-2013, it likely would have come in at over US$700,000.

In a recovering market, rig owners will try to run rates up as quickly as possible, and this time will be no different, according to Westwood. Some rig owners have begun to take the approach of not bidding for work below a certain level, and while that strategy has not yet translated into contract awards, it is only a matter of time. The bottom line is that while Westwood believes the days of US$600,000-plus day rates are gone, there is still plenty of upside potential.

For upcoming contract fixtures, most rig markets remain oversupplied, and thus there is little reason to expect any substantial rate improvement, noted the company. However, in markets where rig supply and demand is tighter, rigs will likely realise higher rates, as will those rigs differentiated by key features and/or capabilities sought by E&P companies.

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