Noble Corp. orders a drillship on speculation

Noble has placed an order for a ultra-deep water harsh environment drillship.
The price of the ship is estimated to be ~$600 million and it is scheduled to be delivered in 1H/2011. Also Noble has options for three additional indentical drillships.

Noble hasn't secured a contract for the vessel, so it's building it on speculation that the deep water market will remain firm in the following years. Noble's management has painted a rather bleak picture in its previous corporate presentations for drillers who have been building new vessels on speculation claiming that some of its competitors are facing delays and manpower shortage and that other drillers have misslead investors about the full costs of their newbuilds. Most of these accusations seemed to be directed at Seadrill and probably stemmed from the failed Smedvig takeover attempt few years ago. 

Noble says that the costs of this drillship is estimated to be $585 million, which seems very low considering that Pride International is paying $745 million for the drillship it ordered a month ago. This price differential is probably explained by the fact that the korean shipyard STX doesn't have experience in building drilling vessels, so its most likely building the ship at cost. Also the design of the ship( Huisman Globetrotter) is brand new. By choosing an inexperienced yard and a new design Noble is taking a quite of a large risk.

Drillers in trouble?

The turmoil in the finance markets is finally starting to effect the offshore sector:

• Nordea predicts finance difficulties for Sevan Marine

• Aban Offshore which had previously delayed the listing of its subsidiary Aban Singapore in Singapore, now plans to list the company in Norway

• MPF Corp. goes under
  

It's the weakest who take the first hit. Sevan has been building "experimental" bucket shaped drilling and floating production vessels on speculation. The company is not in serious trouble yet, but I expect things to get worse. Escalating contruction cost have been causing problems for MPF(Multi purpose floater) for quite awhile.

Aban bought Sinvests shallow water fleet with debt and now the costs of that debt are rising. Aban Singapore's assets are far from premium and I doubt that an IPO in Oslo is going to be very succesful.

Offshore stuff

• Seadrill gets an five year extension for the semi-tender West Alliance. The total value of the contract is 310 million dollars, which would put the day rate between $160 000 and $170 000, approximately 70% higher than West Alliance's current DR of $93 000.

• Three new build jackups entered the market this week, and three exited.

• India's ONGC says : "ONGC is envisaging an investment of over 5 billion USD to start production from deepwater blocks KG-DWN-98/2 and KG-OS-DW-IV by 2013. Non-availability of deepwater and ultra-deepwater rigs in the global market has been a serious impediment in our deepwater campaign".

Norwegian hydrocarbon production up

The total amount of hydrocarbons(crude oil, condensate, NGL, natural gas) produced from the Norwegian portion of Atlantic increased from 137.8 million cubic meters to 142.5 in the first six months of 2008. An increase of 3.4 percentage. However crude oil production from the Norwegian continental shelf decreased by 4.4 million cubic meters(5.8%) in the same period.




Links: Norwegian Petroleum Directorate

Offshore drillers

I find the current valuations of offshore drillers some what strange. Companies with little debt and backlogs worth of billions are have a P/E ratio >10, while most financials have a P/E 13-15. The market seems think that the price of oil will continue to decline and that the financials have bottomed. I find both assumption unlikely to be true. Well actually I do think that oil can drop at least temporarily below $90, but not much lower.

One thing dragging down the valuations of drillers is the dividend yield. Most American drillers dont' pay regular dividends(Pride, RIG, Atwood) and those who do, pay merely nominal amounts(Ensco 0.20%, Noble 0.40%, Diamond 0.50%* Rowan 1.20%). Seadrill of Norway(officially domiciled in Bermuda) is refreshing exception among major drillers as intends to distribute all of its excess cash to shareholders.

The are currently 39 drillships, 50 semi-submersibles and 74 jack-ups under construction at various shipyards around the world(mostly in Asia). All of these vessels will enter the market by the end the year 2012(delays are of course possible). With these newbuilds the number of drillships will increase by 102%(current number 38), semis 31%(160) and jack-ups 20%(376). Currently most industry insiders believe that the market can absorb all these newbuilds.

*DO has paid several special dividends in recent years($5.75 in 2007,$2.00 in 2006)
Links: Rigzone:Rig data, Offshore.no: rigger under bygging, Energywiki