Offshore Drilling – Part I – Complete Overview Of The Drillships … – Seeking Alpha

Source: Drillship Pacific Mistral - Courtesy Offshore Energy Today.

Investment Thesis:

The offshore drilling industry plays an important part in the Oil & Gas supply chain.

Did you know that Oil production from offshore locations accounts for approximately 29% of the global crude oil production in 2015, according to the EIA? This percentage has been nearly constant since 2005. I was not able to find the repartition for 2016, yet. However, It is highly likely that offshore accounts for 28% to 30% as well.

The main locations are in Saudi Arabia, Brazil, Mexico, Norway/UK and the USA and represent a total of approximately 27 Million BOE/d.

The bulk of the crude production is still in the "shallow waters", which are generally cheaper and less technically challenging.

In this area, Oil and Gas producers will need a rig less expensive anchored to the rock floor, called Jack-up.

However, there has also been a move toward "deep waters" and "ultra-deepwaters" projects the past 5 to 10 years. Exploratory drilling in deeper waters and ultra-deep waters is naturally more costly and complex for O & G companies, but technology advancements and the near exhaustion of shallower prospects have forced oil majors to explore increasingly deeper waters, particularly in Brazil, West Africa and in the Gulf of Mexico.

The rigs required to perform the drilling in the "deep waters" segment are called floaters or mainly Drillships and Semi-submersibles. Let's have a look at the Drillships situation here.

A quick review of the Drillship fleet Worldwide as of March 10, 2017.

Note: I have used what has been publicly available on InfieldRigs website and translated to easy-to-read graphs that will help you to understand the situation as we go through 2017. I will update this article every quarters.

Basically, the Drillships segment represents a total of 149 rigs including the ones under-construction as of March 10, 2017. The main categories are as follows:

Excluding the "under-construction" segment we actually have 119 rigs in the market and drilling, ready to drill or waiting to drill. Actually 47.9% of these rigs are working and receiving a day rate from a client. The others are moored, on standby or idle in different states.

Most of these rigs are fairly recent and the average age is 9 years (built 2007).

I have identified 6 different locations where 57 rigs are drilling as of January 1, 2017:

As we can see, North America and more particularly the US Gulf of Mexico, is the main player

together with Brazil they represent approximately 67% of the total drillships contracted. Since the oil crash, West Africa has lost approximately 50% of its drillships fleet.

The middle East and Europe are active both in the jack-ups and Semi-submersibles segments, not really in the deep waters segment.

Brazilian offshore production increased by 58% between 2005 and 2015, making Brazil the second-largest offshore producer in 2015 and probably in 2016 as well. Below a very interesting repartition per location.

This production growth in Brazil was made possible by the expansion of deepwater pre-salt project, which is "deep waters".

Until recently, this field was exclusively owned by Petrobras (NYSE:PBR) (National Oil Company NOC), however, On October 2016, Brazil approved handing Pre-salt oil reserves to Oil Majors such as Statoil (NYSE:STR) or TOTAL (NYSE:TOT) which is expected to boost production.

With production increasing from approximately 41,000 barrels per day in 2010 to a million in mid-2016, Petrobras believes Brazil's pre-salt discovery is one of the world's most important in the past decade. It is believed that reserves of over 50 billion barrels could exist in the basin, nearly four times the current national reserves of roughly 14 billion barrels.

The United States offshore production has been boosted by recent strong production in the Gulf of Mexico.

According to EIA in February 2016:

Between 2008 and 2016, offshore production has grown nearly 19%, with several large projects coming online in 2016 and 2017. The Gulf of Mexico saw a production of 1.728 MBOEd in December 2016, according to EIA (From 0.72 MBOEd in 1982).

West/East Africa segment has seen a huge decline in Deep waters and the actual production of 4.6 MBOEd is set to dip to 2.6 MBOEd by 2030, unless CapEx is restored in this area, according to WoodMcEnzie.

Wood Mackenzie claims planned oil and gas investments in Sub-Saharan Africa over the next five years have been reduced by $100 billion. Major oil company cutbacks account for the bulk of the reductions.

Conclusion:

The deep waters segment is an important segment and investors should not avoid this sector as a long-term investment just because it is experiencing a terrible downturn. Yes, it is struggling but.

As Mark Twain once commented to a reporter "The reports of my death are greatly exaggerated." after "hearing on good authority that it was thought to be dead", offshore drilling is definitely struggling but is far from dead.

The main issue for us all, is to apply the right trading/investing strategy by following closely what is going on. The drillship segment is quite small and easy to follow.

The actual situation is not positive, and the near-term may likely bring more pain. However, It is clear to me that we have reached a bottom though, if oil prices can trade above $50-$60 a barrel in the second part of 2017? Oil prices are of a paramount importance.

Last week, we experienced some serious oil price weakness after the EIA reported a record US stock pile now at 528.4 Mbo. However, it is clear that OPEC and non OPEC will likely continue to cut production despite the US Shale booming again, with a production approaching the 9.2 MBOPD again...

Please read my most recent article about this situation. Click here.

Understanding the industry through simple numbers helps to decide and pinpoint the right timing and the right company. One of my main companies in this sector is Transocean Ltd. (NYSE:RIG) -- the strongest in the drillship/semi-submersible sector by far with a backlog over $11 billion comprising of $7+ billion for the floater segment -- Other such as Noble (NYSE:NE), Ensco (NYSE:ESV), Rowan (NYSE:RDC), Diamond offshore (NYSE:DO) could be also selected as good candidates.

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

Disclosure: I am/we are long RIG, ESV, RDC.

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 may add NE and DO?

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Offshore Drilling - Part I - Complete Overview Of The Drillships ... - Seeking Alpha