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Still Waters Run Deep for Drillers
04/23/2009 12:00 pm EST
Elliott Gue, editor of The Energy Strategist, likes two drillers that focus on the healthiest part of their market—deep water drilling.
Contract drillers are in the business of leasing rigs to operators for a fixed fee known as a day rate. There are really three offshore contract drilling markets to watch: jackups, midwater floaters, and deepwater rigs. The first two markets are either showing outright weakness already or showing signs of softening. The market for deepwater rigs has remained resilient.
The two drillers in my coverage universe with the most direct leverage to deepwater rigs are Norway-based Seadrill (OTC: SDRLF) and US deepwater giant Transocean (NYSE: RIG).
Transocean is the world’s largest offshore drilling company, with 136 rigs as well as ten under construction. Roughly 68 of those rigs are “semisubmersibles,” and 39 are ultra-deepwater or deepwater rigs capable of drilling many of the complex plays being targeted around the world today. All ten rigs the company has under construction are deepwater rigs, with eight qualifying as ultra-deepwater rigs.
In its fourth-quarter 2008 earnings report, Transocean stated that it’s seeing considerable weakness in its jackup business in all parts of the world. [It] also has two midwater floaters that have already been idled, and it has indicated more rigs are likely to suffer the same fate.
The real value in Transocean is its massive deepwater fleet, which has, for the most part, already been contracted under long-term deals. In fact, all ten of the rigs Transocean already has under construction have been contracted for work as soon as they’re completed and put into service.
Transocean has a $39-billion backlog of rig contracts. These consist mainly of deepwater rigs that have already been contracted under firm deals but haven’t yet completed their prescribed work. That backlog is off about $2 billion from the levels the company reported last quarter but represents a solid base of revenues for Transocean regardless of the path of commodity prices. Given this huge base of locked-in cash flow, the company has been repurchasing stock and paying down debt. (Transocean closed at about $65 Wednesday—Editor.)
Seadrill has 14 floater rigs, 13 of which are highly capable deepwater or ultra-deepwater rigs. Seadrill’s deepwater rigs are largely contracted under favorable deals at attractive day-rates. Because Seadrill was later in contracting many of its rigs it has, as a rule, obtained higher day-rates for its deepwater rigs than Transocean. The company has a total of $12.7 billion in backlog, a sizeable sum for a relatively small company.
[Seadrill] took on considerable debt to fund its new drilling rig program and still has a sizable debt burden. Given Seadrill’s massive backlog of locked-in deepwater contracts, the firm’s debts look manageable, but it remains a psychological risk in the current market environment.
Seadrill is a buy. As concerns about Seadrill’s debt burden abate, the stock should continue to recover. (It traded around $10 over the counter Wednesday—Editor.)
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