2 Offshore Drillers In The Race For The OGNC 3-Year Contracts After Seadrill Drops Out – Seeking Alpha

Courtesy: The 6G ultra-deepwater drillship Platinum Explorer (Operational in 2010) owned by Vantage Drilling Inc (Private company).

Investment thesis:

The offshore drilling industry plays an important role in the oil and gas supply chain; no one can deny this basic principle even if the industry is now struggling through a strong downturn. Did you know that oil production from offshore locations represents about 29% of the global crude oil production in 2015, according to the EIA? This percentage has been nearly constant since 2005 and is expected to remain the same until 2040.

The bulk of the crude offshore production is still in the "shallow waters," which are generally cheaper and less technically challenging when compared to other offshore segments such as the deepwater and the ultra-deepwater.

However, this trend will gradually change according to Wood Mackenzie in early April 2017, who was claiming that deepwater developments are turning increasingly competitive, even compared to tight oil.

Angus Rodger, Asia-Pacific upstream research director at Wood Mackenzie, said: "We are at last beginning to see the first signs of recovery in deepwater, driven primarily by cost reduction and portfolio high-grading. Projects in the U.S. Gulf of Mexico in particular have made significant strides, with many reducing NPV15 break-evens from above $70/boe to below $50 per boe.

One important area that could help the offshore industry to survive this downturn is India offshore, which is the main topic of my article today. ONGC is active and is about to award three rigs on a three-year contract for its KG-DWN-98/2 block.

Description of the Krishna Godavari basin:

Total oil initially in place in the KG-DWN-98/2 block is estimated at 106 million cubic meters, production of only 26.71 million cubic meters is envisaged during 2019-2031.

Similarly, the gas initially in place is estimated at 69.57 billion cubic meters "BCM," of which only 51.33 BCM can be produced during 2018-34.

I - The ONGC tender.

On March 3, 2017, We learn from Upstream that ONGC is now close to award the three 3-year contracts.

Three leading international drilling contractors are poised to win three-year, deep-water rig contracts from India's Oil & Natural Gas Corporation (ONGC) for its flagship Block KG-DWN-98/2 development off the country's east coast.

ONGC requires two 1500-metre, dynamically positioned drillships or semi-submersibles in one category and a single anchor-moored rig capable of drilling in 600 meters of water in the second.

London-headquartered giant Seadrill and Singapore's Vantage Drilling are expected to win three-year rig charter contracts in the 1500-metre category, while Brazil's Queiroz Galvao Oil & Gas (QGOG) is likely to win a three-year rig contract in the 600-metre category, sources said.

On February 27, 2017, commercial bids were opened by ONGC and the results are indicated in a small table below:

Seadrill with its Subsidiarie Sevan Drilling.

Sevan Drilling ASA (SEVDR.OL) (OTCPK:SDRNF), listed on the Oslo stock exchange: Seadrill (NYSE:SDRL) owns 50.11% (14.897 million shares) of the company.

Semisubmersible Sevan Driller (2009)

Actually Ready stacked in Singapore

[Dropped out of the race]

Drillship Platinum Explorer

(2010)

Actually Ready stacked in India

Midwater Semisub Olinda Star

(1983)

Actually Ready stacked in Brazil

[Has been awarded the contract according to Upstream]

Transocean (RIG) is said to be the biggest loser in this fight for survival. The company offered no less than three drillships in the first category and one semisubmersible in the second category:

More than a dozen rigs were offered by nine contractors in the 1500-metre category.

Transocean is believed to have offered the highest bid with $166,750/d for the three drillships offered. For the second category, Transocean was the second bidder with $146,050/day (only three bidders in this category with the Semisubmersible Hakuryu-5 from Japan drilling but seems to have been disqualified?

II - New development released on May 24, 2017.

According to Upstream on May 24, 2017:

Vantage Drilling and Universal Energy have emerged as front-runners to secure three-year deep-water drilling contracts from India's Oil & Natural Gas Corporation (ONGC) after original low bidder Seadrill withdrew from the race.

State-controlled ONGC is looking for two 1500-metre, dynamically-positioned drillships or semi-submersible rigs to drill wells for its flagship Block KG-DWN-98/2 off India's east coast.

Well-placed sources said Seadrill was no longer in the race, and Vantage Drilling - which was already well placed for an award - and Universal Energy likely to win contracts.

"Seadrill is out of the fray and has declined to extend its bid validity. The second and third lowest bidders (Vantage and Universal) are expected to win, once they match the lowest dayrate," a drilling source said.

A Seadrill spokesman confirmed the company had pulled out, explaining that there were "delays in the tender process, which led to Seadrill being unable to secure the shipyard slot for the Sevan Driller to be able to meet the delivery date".

As a result, "we did not extend our bid validity", he added.

The semi-submersible Sevan Driller is now out of the race, after Seadrill declined to extend the bid validity for another two months, saying that it could not meet the delivery date in this case. The rig is actually ready stacked in Malaysia according to infieldRigs.

What next?

Drilling sources suggested ONGC is expected shortly to invite the second and the third lowest bidder for negotiations and ask them to match Seadrill's rate.

Vantage Drilling was placed a close second in the rig tender, offering an operating dayrate of $129,582 (tax inclusive) for the drillship Platinum Explorer, while Universal was third in line, quoting $138,000 for the semisub Louisiana, managed by Brazil's Petroserv Marine.

One drilling source pointed to the possibility of a re-tender, if the other bidders do not agree to match the original lowest dayrate offered by Seadrill.

However, a second source cautioned that a re-tender could lead to further delays and affect ONGC's completion schedule for KG-DWN-98/2.

Vantage Drilling Inc and Universal Energy Corp., (two privates companies) are now first and second, and will be asked by ONGC to match the $124,889 per day (tax inclusive) proposed by Seadrill. This is a total backlog including tax of about $137 million.

Note: I believe the day rate excluding the tax is about $112,000 per day.

Conclusion:

I am totally flabbergasted by the low day rate proposed here for a modern 6th generation drillship, such as the Platinum Explorer. Is it anywhere near the breakeven price? I seriously doubt it.

According to Markit index. The day rate for drillships and semisubs in May 2017 is about $200k/d. We are talking about 38% lower for ONGC?

I see it as both a blessing and a curse long term for the offshore Industry.

A blessing because three rigs will be working for the next three years, and a curse because the day rates are now basically well below breakeven prices. Rig attrition will accelerate if day rate plummet.

This is a new trend that may continue for years to come, and will eventually hurt the few remaining offshore drillers still showing an acceptable balance sheet, such as Transocean (NYSE:RIG) or Ensco (NYSE:ESV).

A dangerous unsettling issue that jeopardizes the "survivors."

Competition is naturally turning destructive. New companies are created or emerged from bankruptcy with a "fresh-start accounting" and modern attractive assets.

They become everyone'else problem.

Let's take for example Vantage Drilling International - a private company now, which emerged from bankruptcy in February 2016 - with a fleet of four Ultra-Premium Marine Pacific Class375 Jackups, and three modern 6G Ultra-Deepwater 10,000 ft & 12,000 ft Drillships.

In short, after emerging from bankruptcy, the company took care of its $2.7 billion in debt and now shows $869 million in total debt, and a cash of $232 million.

The immediate consequence is that companies such as Transocean and others who are still struggling with a large debt and did not restructure are competing unfairly with players "on steroid", who can drive the day rate to an unrealistic level and still be able to survive somehow.

However, the survivors have still a strong hand in their favor, called: Innovation.

To survive, there are several paths a rig owners can take to ensure they end up in a more viable position while the market recovers

Time will tell...

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, ESV, NE.

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 am day trading SDRL frequently.

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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2 Offshore Drillers In The Race For The OGNC 3-Year Contracts After Seadrill Drops Out - Seeking Alpha