As offshore drilling contractors claw their way back from the downturn, Noble Corp. (NYSE: NE) sees positive signs emerging—especially for premium jackups in the Middle East and the North Sea.
“We’re seeing visible signs of the market firming on the jackup side,” Adam Peakes, senior vice president and CFO for Noble Corp., said May 15 during Citi Global Energy and Utilities Conference in Boston. But “It’s fair to say we’re kind of bouncing along the bottom on the ultradeepwater drillship side.”
Offshore drillers were dealt crippling blows when lower oil prices prompted oil and gas companies to reduce exploration spending, lower activity and seek cost cuts. But rising oil prices have given way to more action, sending demand for premium jackup and harsh-environment rigs higher as utilization rates pick up.
The Brent spot price sank as low as $26 per barrel in January 2016 but has since climbed above $78 per barrel. That bodes especially well for companies drilling in places such as the North Sea, a mature basin with remaining hydrocarbons and existing infrastructure.
Peakes pointed to the short-cycle time needed to bring on some North Sea barrels and M&A activity that has put assets into the hands of smaller independents and private-equity-backed companies more likely to work on assets in the short-term compared to larger IOCs. He said Noble is bidding on jackup work in the North Sea for 2019 with day rates between 30% and 40% higher than today’s rates. While today’s rates may not be considered great, he said, “it’s got to start somewhere.”
The offshore drilling scene is also looking positive for Noble in the Middle East, where Peakes said was “fairly resilient” during the downturn as far as rig demand. “Clearly there was meaningful day rate compression but the demand picture actually held up fairly well there and we see continued interest, tenders and opportunities for the Middle East to grow from where we sit today,” he added.
The latest international rig count from Baker Hughes, a GE company, shows more rigs are pumping. The count—which covers Africa, the Asia Pacific, Europe, Latin America and the Middle East—rose to 978 in April compared to 956 a year ago. So far, Africa has seen the greatest gain this year, rising from 80 rigs in January to 94 rigs in April. But the region’s rig count is far outnumbered by the Middle East, Latin America and Asia Pacific.
Though the sector appears to be healing, albeit slowly compared to other parts of the oil and gas industry, improvement is not quite widespread for offshore drillers, according to Peakes.
“It’s not yet across the board in all asset classes in all geographies but we’re certainly seeing signs of strength in the premium jackup market. Three or four months ago I think the only bright spot in the global rig picture was the harsh-environment semi market,” Peakes said.
Currently, Noble’s fleet includes eight drillships, five under contract; six semisubmersibles, two under contract; and 14 jackups, 10 under contract.
Analysts at Moody’s Investor Service don’t foresee a recovery for offshore services, including offshore drillers, before mid-2019. Weak demand and overcapacity remain concerns.
“Although offshore drillers have stacked or scrapped rigs, the utilization for floaters is still very weak. A significant number of floaters coming off contracts by the end of 2018, and with many new rigs still to add to the oversupply, the supply/demand imbalance will likely continue to weaken floater day-rates at least through 2019,” Sreedhar Kona, vice president—senior analyst for Moody’s, said in a note May 11.
“Still, customer inquiries for jackups have increased, thanks to a larger, more diversified and lower-cost market dominated by national oil companies, some of which rely heavily on shallow-water production,” Kona added. “Although jackup day rates are still depressed, they have risen from their worst levels, and several contracts have recently been awarded in the Persian Gulf, North Sea and Southeast Asia. Even so, contract tenors have shortened considerably, with producers keeping capital spending flexible, and drillers trying to avoid locking themselves into long-term contracts at low rates.”
Noble reported in May a first-quarter 2018 net loss of $235.2 million, down from $363 million a year ago. The results were reflective of an early retirement of debt, lower fleet utilization, lower average day rates, fewer operating days for jackups and fewer calendar days in the quarter, the company said.
Still, the results were better than analysts had expected. Adjusting for one-time items, Noble lost 55 cents per share when analysts on average anticipated a loss of 57 cents, according to a Reuters report. Noble’s average rig utilization rate—which dropped during the quarter to 47% from 60% a year earlier—was already looking up at the time of the quarterly update, considering the company said two of its premium jackups landed new contracts (one in the North Sea and another offshore Qatar).
Big Backlog, Customers
Helping Noble recover through the downturn is its backlog of nearly $3 billion and lower operating costs, down between 30% and 40% from 2014 levels.
“We’re also fortunate in that our backlog is not just concentrated in the next year or two. The backlog extends well into the next decade. We think that gives us an advantage,” Peakes said.
Noble’s roster of large customers includes Royal Dutch Shell as well as Statoil, Saudi Aramco and Exxon Mobil, which awarded Noble a three-year contract for work offshore Guyana.
Peakes characterized large IOCs as customers that matter most when it comes to ultradeepwater drilling, but they are “not going to be quick to react to short-term moves at the front of the curve.” Instead, their moves have been “a slow and steady build over the course of 2017 and we’re continuing to see that build culminate in actual contract awards.”
Considering many recognize the need to grow reserves and increase spending after several years of underinvestment, according to Peakes, more drilling activity could be forthcoming. This includes areas where majors have picked up acreage such as offshore Mexico and Brazil along with exploration hotspots such as offshore Guyana.
“We see that universe of folks growing and contracting more rigs. We’re seeing more term opportunities from all of those guys and I think that’s a recognition [that] yes today there are plenty of rigs,” he said. “But if we’ve really got work for the next three years it’s OK to go ahead and lock something down at today’s day rate, which is if not as low as it’s going to go it’s got to be pretty close.”
Velda Addison can be reached at firstname.lastname@example.org.