Why Investors Should Care about Offshore Drillers' Fleets
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The world's offshore drilling fleet can be divided into 4 groups by maximum operating water depth: shallow (up to 450 feet), mid-water (over 450 but less than 4500 feet), deepwater (4500 to 7500 feet) and ultra-deepwater (over 7500 feet). According to Seadrill Ltd.'s (NYSE: SDRL) latest 20-F SEC filing dated April 27, 2012, the world's existing drilling fleet consists of 797 rigs: 497 (62%) shallow water (jack-ups and tender barges), 113 (14%) ultra-deepwater (semi-submersibles and drillships) and 187 (24%) mid and deepwater rigs. All these rigs can operate in benign environments (BE), but only 42 (5%) are capable of operating under extreme marine and temperature conditions or harsh environments (HE). Not surprisingly, HE vessels command premium dayrates. As an example, the average dayrate for SDRL's BE jack-ups is $131,800 vs. $320,500 for the HE ones. (For more information on the various types of rigs, see: http://www.seadrill.com/drilling_units/fleet_concepts.)
The Effect of Fleet Composition and Age
Deepwater vessels generally command higher dayrates than shallow water rigs.
Fleet age is important because dayrates are usually lower for older vessels . With the above in mind, let's look at the following offshore driller's fleets: Atwood Oceanics, Inc. (NYSE: ATW), Diamond Offshore Drilling, Inc. (NYSE: DO), Ensco PLC (NYSE: ESV), Seadrill and Transocean Ltd. (NYSE: RIG).
The following table is based on the latest fleet reports. As you can see, SDRL receives the highest average total dayrate. Its fleet is the among the youngest and and also has a high percentage of deepwater and ultra-deepwater rigs. RIG is a close second due to the high average dayrate it receives for its modern ultra-deepwater fleet (average age 8.8 years) which is fully utilized and currently averaging a dayrate of $512,379. (The average fleet age is based on the year a vessel was first placed in service and does not reflect any subsequent upgrades.)
|Ticker||Avg Total Fleet Age||% of Deepwater and Ultra-Deepwater Rigs||% of Shallow Water Rigs||Total Rigs||Avg Total Dayrate|
Fleet composition is very important during economic downturns and/or periods of low natural gas and oil prices. Since the contracts for BE jack-ups are typically a year or less, companies with a large percentage of these rigs in their fleets, experience greater sales declines than those with a greater percentage of deepwater and ultra-deepwater rigs, which typically have contracts lasting several years. This was especially evident during the latest recession which officially started in December, 2008 and ended in June, 2009.
The following table compares Annual Sales in millions of dollars, the year-over-year (Y/Y) Change in Sales and the Percentage of Shallow Water Rigs for each driller for the years 2008-2011. (Note: ATW's fiscal year ends September 30th, so their results were adjusted to provide the trailing twelve months (TTM) sales for the periods ending December 31st.)
|Yr. ending 12/31/08||Sales (M$)||581||3,544||2,243||12,674||2,106|
|Yr. ending 12/31/09||Sales (M$)||585||3,631||1,889||11,441||3,254|
|Change in Sales (Y/Y)||0.7%||2.5%||-15.8%||-9.7%||54.5%|
|% Shallow Water Rigs||44.4%||20.0%||93.5%||43.9%||34.6%|
|Yr. ending 12/31/10||Sales (M$)||633||3,323||1,697||9,466||4,041|
|Change in Sales (Y/Y)||8.1%||-8.5%||-10.2%||-17.3%||24.2%|
|% Shallow Water Rigs||44.4%||20.0%||91.5%||41.9%||46.2%|
|Yr. ending 12/31/11||Sales (M$)||683||3,322||2,843||9,142||4,192|
|Change in Sales (Y/Y)||8.0%||0.0%||67.5%||-3.4%||3.7%|
|% Shallow Water Rigs||40.0%||20.0%||64.4%||41.9%||42.5%|
|Yr. ending 2008 vs. 2011||Change in Sales (Y/Y)||17.6%||-6.3%||26.8%||-27.9%||99.1%|
Of the 5 companies, ESV, with the largest percentage of shallow water rigs, was the most affected, experiencing a 15.2% decline in sales in 2009 followed by another 10.2% decline in 2010. RIG's 17.3% decline in 2010 was partially due to the BP Macondo well blowout in the Gulf of Mexico involving their rig, the Deepwater Horizon and the subsequent drilling moratorium. ESV's 67.5% increase in sales in 2011 vs. 2010 was largely due to their acquisition of Pride International in 2011, whose 2010 sales amounted to $1,460 million.
But, perhaps, the most interesting thing about this chart is the last line which shows just who has and who hasn't really recovered from the recession and grown their business over the years 2008-2011. The losers are DO and RIG. The big winner is SDRL whose 99.1% increase in sales between 2008 and 2011 was due mainly to their investment in their fleet which increased by 58% over the period from 23 rigs to 40. ATW has also made a large investment in their fleet with 3 new rigs being delivered this year and 3 more in the next 2 years. The benefits of this investment should be seen in the future.
Utilization Rate Counts
Rigs earn money when they are being used, not when they are sitting in a shipyard. The following table for the twelve months ending December 31, 2011 tells the story. ATW's and SDRL's fleets had the highest total utilization rates of 96% and 92%, respectively. While RIG's was the lowest at 61%.
|Utilization Rates for the Year Ending 12/31/11|
|ATW||Breakdown not provided||96%|
Current Backlog Reflects Customers' Preferences
The following table shows the backlogs for each driller as of their latest quarterly report. The backlog is the contracted daily rate multiplied by the number of days remaining on the contract, assuming full utilization. To give you an idea of what these numbers mean, I have compared each driller's reported backlog with their most recent trailing twelve months' sales.
|Ticker||Sales (TTM) ($M)||Backlog ($M)||Backlog as a % of TTM Sales|
SDRL with their modern fleet and focus on niche markets, like tender rigs, leads the pack with a backlog equal to 334% of their TTM sales. Of the 29 current tender rigs in the world, SDRL has 16. And the nice thing about them is their high utilization rate. This year, SDRL's tender rig utilization rate is expected to be 96% vs. 92% last year. The rate for the world's fleet is 86%.
Backlog Trend Tells the Story and the Future
One more thing you should carefully consider is the trend in drillers' backlogs over the last 4 years. As can be seen from the following table, RIG has the largest backlog, but it has been decreasing every year since 2008.
|Reported Backlog in $M for Period Ending|
|Note: ESV's numbers after 2010 include acquistion of Pride Int'l|
Moreover, they just lowered it again last quarter by 8.4%. ATW and DO are still below their 2008 levels. They have made progress since 2010, but unfortunately both lowered their estimates this past quarter. ESV's progress is partly organic and partly due to their 2011 acquisition of Pride International, which greatly improved the composition of their fleet. The only driller who has consistently increased their backlog period after period is SDRL.
Bottom line, fleet age and composition are key to a driller's success. If nothing else, check the current backlog and its trend over the last few years.
p366 owns shares of Seadrill, Ltd. The Motley Fool owns shares of Ensco, Transocean, and Seadrill, Ltd. Motley Fool newsletter services recommend Atwood Oceanics and Seadrill, Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.