Offshore Drilling – Rig Attrition Analysis: Trend And Outlook – Seeking Alpha

Image: Jack-up Rig.

Investment Thesis:

One important element for a robust and sustaining recovery in the offshore drilling industry is a fast rig attrition without the shadow of a doubt. The over-capacity is as important as the price of oil, in my opinion. In short, the industry is suffering a lingering rig over-capacity, which slows down the prospect of a recovery and keeps the day rates at an unsettling low level. However, while the low day rate could be seen as a negative, conversely, it can also offer the incentive necessary to produce more tendering opportunities by lowering the cost of drilling on a per barrel basis.

This article analyzes how fast is the rig attrition really going, by showing its progression for the first six months of 2017.

Note: I used data from infieldRigs

Data Analysis:

In general the drilling rigs are comprised of four classes:

Warning: I will study the three first classes and leave the Tenders which doesn't represent an important class, in my opinion.

1 - Let see how fast is the rig count going down?

Since January, the offshore industry scrapped or canceled:

Obviously, the attrition rate of the floater, is much higher than the attrition rate of the jack-up, due mainly to the cost of stacking. Cold stacking a Jack-up costs only couple $K. However, 43 rigs have been scrapped or canceled during the first half of 2017.

We have now 934 rigs in total with 421 rigs operating.

2 - Let's look now at the status per class.

Conclusion:

Utilization is apparently too low, averaging 45.07%. An acceptable use of a minimum of 50+% requires that the industry scraps more or cancel more under-construction rigs. This is what we call over-capacity.

To be able to meet a more balanced fleet status based on a 50% utilization, as of today, we can estimate quickly how many rigs need to be scrapped:

A total of 92 rigs should be retired or canceled before the market can start to balance again, in my opinion. This situation is not homogeneous throughout the three classes and the semi-submersible class needs more attention.

However, while the jack-up class seems more balanced than the floaters' classes, it is paramount to look at the "under-construction" situation as well, especially the delivery expected or delivery potential.

For example, it is highly unlikely that Paragon offshore (OTCPK:PGNPQ) will take delivery of the Prospector 6, Prospector 7 and Prospector 8 Jack-ups while they are still listed as "under-construction".

The same situation for Seadrill (SDRL) who has about 7 jack-ups under-construction. These rigs will be "re-organized" with the new restructuring plan.

The same thinking applied for the floaters as well. Most of the rigs under-construction have been already delayed for two years or more and, in some special cases, may never be built and likely to be canceled.

Everyone here knows about Sete Brazil, which on April 2016 filed for bankruptcy protection, as its only client Petrobras failed to book a big enough drilling rig order, cutting the initial plan for 28 rigs down to ten, last year.

Finally, one interesting segment is the "cold stacked" rigs.

These rigs are likely to be held for sale and scrapped later, especially in this difficult contracting environment with dismal day rates. To be able to bring back a cold stacked rig to life again, the offshore driller will have to spend a very large amount -- between $50 million to $100 million -- which cannot be recouped with a midterm contract at low day rate. In fact, we can consider the "cold stacked" rigs as "to be scrapped soon". The cold stacking process is a slow death sentence, period.

For example, Paragon Offshore still struggling in bankruptcy protection owns 40 rigs. However, if we look closer, we can see that PGNPQ lists 13 jack-ups and 4 drillships as "cold stacked". The drillships have been delivered in 1975-1978 and are over 40 years old. Thus, 17 obsolete rigs that will be sold and scrapped very soon.

We can also look at Transocean (RIG) and its 50 rig fleet with about 23 floaters classified as "cold stacked". The majority of these rigs is practically obsolete and will be sold for scrap sooner or later.

The actual over-capacity is not really here anymore. It is just an over-capacity "on paper" and the fleet worldwide is more balanced than it looks, and we could argue that the re-balancing is, in fact, not far from happening. The Industry needs more contracting activity, period.

Important note: Do not forget to follow me on the offshore drilling industry. Thank you for your support.

Disclosure: I am/we are long RIG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I day trade SDRL and trade RIG on special occasions.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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