As of April 2013, Source: Fernley Offshore

The above graph from Fernley Offshore shows the trend of increasing day rates already being secured by operators over the coming years.  Ocean Rig’s current contract backlog stands at $4.8 billion, a 40 percent increase since the first quarter of 2012.

The demand for deepwater exploration is certainly there.  Ocean Rig notes in their presentation that all 99 UDW rigs in the Gulf of Mexico, South America, and Africa are currently under contract and the below graph from Wood Mackenzie shows the future demand only getting stronger.

Note: Deepwater defined as water depths of over 400 meters and less than 1,500 meters. Ultra-deepwater defined as water depths of 1,500 meters or greater
Source: Wood Mackenzie, reserves discovered data based on oil industry research reports and company data.

Ocean Rig plans to capitalize on this prospective growth and will be accepting delivery of three drillships, the Ocean Rig Mylos, Ocean Rig Skyros and Ocean Rig Athena by the end of 2013.  In addition, last October the Athens-based drilling contractor placed an order for sistership to the three 7th-generation drillships currently under construction at Samsung Heavy.  This new rig has a scheduled delivery date of January 2015.

In their earnings presentation, Ocean Rig commented that 20 new UDW contracts or extensions have been signed so far in 2013, the majority of which was focused in the Gulf of Mexico and West African regions.

For the first quarter of 2013, Ocean Rig reported a net income of $6.4 million and Adjusted EBITDA of $104.7 million compared to $50.7 million for the first quarter of 2012.

Ocean Rig experienced a net loss of $46.3 million in the first quarter of 2012.

Well no kidding.

It seems completely ridiculous that U.S. regulators would even consider allowing energy companies drill in the Arctic Ocean when relatively easy-to-reach hydrocarbon resources exist right off the shore of Virginia and California.  More importantly however, is the fact that the critical infrastructure to support such an industry already exists, or can be easily and quickly established in these areas.

Senator Kaine and his colleague Senator Mark Warner announced yesterday their reintroduction of “The Virginia Outer Continental Shelf Energy Production Act of 2013. “

In a press statement, Senator Warner notes, “I have long advocated for additional exploration and the responsible production of domestic energy resources off of Virginia’s coast.  Our legislation includes appropriate environmental protections and an equitable formula for sharing revenues between the state and federal governments. I believe that changes in the membership of the Senate after the 2012 elections have helped to produce a potentially more supportive atmosphere for our legislation.”

I truly believe Senator Warner and Kaine’s support for the “The Virginia Outer Continental Shelf Energy Production Act of 2013″ is very good news for anyone living in Virginia, and for the United States.  In the interest of full disclosure I must admit however, that I have worked in the offshore drilling industry, pre-Deepwater Horizon and have gained a significant amount of perspective from the operational side of things.

I’m not discounting the fact that the potential exists for another catastrophic blowout, but it also exists in the arctic, on land, and anywhere else in the world drilling is occurring.  The production of oil and gas has, and always will involve a certain level of risk, however should disaster strike, Virginia has the resources and manpower to deal with such an issue quickly.

Listen to Senator Mark Warner and Senator Tim Kaine’s remarks:

Congress has shown support as well…

On April 26, 2013, Virginia Congressman Scott Rigell sponsored the Virginia Jobs and Energy Act (H.R. 1782) to open the Outer Continental Shelf (OCS) off the coast of Virginia for energy development.

Original co-sponsors of the bill include Virginia Representatives Rob Wittman (VA-1), Robert Hurt (VA-5), and Morgan Griffith (VA-9). Governor Bob McDonnell and Virginia’s U.S. Senators, both Democrats, have signaled their support for similar legislation.

On the 7th of May, this bill was referred to House subcommittee and it has subsequently been referred to the Subcommittee on Energy and Mineral Resources chaired by Colorado Congressman Doug Lamborn.

Image: Teekay

Teekay Offshore Partners L.P. (NYSE:TOO) announced an agreement with Statoil to provide a floating storage and offtake (FSO) unit for the Gina Krog oil and gas field located in North Sea.

The contract will be serviced by a new FSO unit converted from the 1995-built shuttle tanker, Randgrid, which is currently 67 percent owned by Teekay Offshore. TOO will finance the $200 million conversion and acquire the remaining 33 percent ownership of the vessel in the process.

Upon delivery in Q1 2017, the newly converted FSO unit will commence operations under a 3-year firm period time-charter contract to Statoil, which includes 12 additional one-year extension options.

“This strategically important conversion project represents another milestone in Teekay Offshore’s expanding FSO franchise,” commented Ingvild Sæther, President, Teekay Shuttle and Offshore Services. “The Gina Krog FSO project highlights how Teekay Offshore can combine its growing offshore project development capability and financial resources to provide an FSO solution to Statoil while repurposing an existing shuttle tanker asset to generate distributable cash flow accretion.”

At the beginning of May, Teekay Offshore signed an agreement with Salamander Energy to convert one of their shuttle tankers, the Navion Clipper, to an FSO unit.  Once converted in 2H 2014, this vessel will operate offshore Thailand under a 10-year charter contract commencing in the third quarter of 2014.   According to TOO’s market filing this month, the capital cost of the Navion Clipper conversion is approximately $50 million with and estimated associated annual cash flow of approximately $6.5 million.

Image: Total, click for larger

Qatar Petroleum International (QPI) and Total announced a landmark partnership agreement with Total E&P Congo today representing QPI’s first international investment in an offshore oil and gas project.

The agreement involves a 15% share capital increase in Total E&P Congo by QPI however, the value of this investment was not disclosed.  In a statement on their website, Total notes that his investment will be directed toward the development of the Moho Nord project.

This investment reflects a strategic move toward expanding QPI’s international presence, particularly with regard to Africa according to a statement by QPI Chairman and Minister of Energy and Industry, Dr. Mohammed Bin Saleh Al Sada.

Although the Moho Nord field is primarily focused on oil production with an anticipated production rate of 140,000 boe/d by 2017, Qatar’s presence in the Congo could reflect a more strategic move with respect to Congo’s gas reserves.

According to the Oil & Gas Journal, Congo holds one-fifth of the proven gas reserves in sub-Saharan Africa.  A recent EIA report notes that 334 billion cubic feet (bcf) of gas were produced by the Congo in 2011, yet only 15 percent (51 Bcf) was marketed.  The majority of the natural gas, 68 percent (228 Bcf), was reinjected to boost oil production and the remaining 17 percent (55 Bcf) was flared or vented.

John T. Rynd, Chief Executive Officer and President of Hercules Offshore stated, “The sale of our Inland rigs is consistent with our on-going efforts to rationalize non-core assets.  Market challenges in this segment have been significant over the past several years, making it difficult to generate a positive return from these assets.  We do not expect these challenges to materially abate.  The sale will generate cash proceeds that can be reinvested in higher returning assets that are strategic to our growth objectives.”

A NASA photograph shows the extend of the Gulf Oil Spill in 2010. Photo: NASA

Jonathan Stearns

May 21 (Bloomberg) — The European Union tightened safety rules for offshore oil and natural-gas exploration to curb the risk of a major accident after BP Plc’s 2010 spill in the Gulf of Mexico, the largest in U.S. history.

The European Parliament approved legislation that forces oil and gas companies to submit special hazard reports and emergency-response plans before offshore operations can start. The law also requires operators of offshore platforms to prove their ability to cover potential liabilities and extends the zone in which businesses would be liable for damage to 370 kilometers (230 miles) off the coast from the current 22 kilometers.

“The rules we are currently coming up with can be used as a template at international level,” said Ivo Belet, a Belgian member who steered the legislation through the 27-nation EU assembly today in Strasbourg, France. EU governments have already signaled support for the law, making their final approval a formality in the coming weeks or months.

The tighter regulation marks the EU’s effort to improve safety and bolster the “polluter pays” principle in the energy industry following the Gulf of Mexico spill three years ago. Eleven rig workers died and more than 4.1 million barrels of crude gushed into the Gulf after the Deepwater Horizon rig exploded and sank while drilling BP’s Macondo well off the Louisiana coast.

The EU has almost 1,000 offshore oil installations, including 486 in the U.K., 181 in the Netherlands and 61 in Denmark, the European Commission, the bloc’s regulatory arm in Brussels, said when proposing the new rules in October 2011. The average cost of offshore oil and gas accidents in the EU ranges from 205 million euros ($264 million) to 915 million euros a year, the commission said at the time.

Representatives of the International Association of Oil and Gas Producers weren’t immediately reachable by telephone at the group’s London and Brussels offices to comment on the new EU legislation.

Copyright 2013 Bloomberg.

Eike Batista doesn’t have much to smile about these days. According to Forbes in March, Batista’s net worth dropped $19.4 billion compared to a year earlier.

London-based Kingfish Trading has cancelled an order for 11 tankers that were to be constructed at OSX Brasil’s Açu shipyard, OSX said in statement late Friday.

Kingfish ordered the 11 medium-range, 45,000 DWT tankers from OSX in March 2012 for $732 million. The vessels were to be built at OSX’s Açu port complex, which is under construction in  northern Rio de Janeiro state.

OSX Brasil is the shipyard and ship leasing company controlled by Brazilian billionaire Eike Batista.

OSX also announced Friday that it will scale back the construction of its shipyard at Açu. In the statement, OSX said it still plans to build the Açu shipyard to its original size and scope, but it would limit ongoing construction to that necessary for current orders. Future construction, it added, will be dictated by future demand.

In addition, OSX’s board has decided to exercise part of a put option that will trigger a payment of $120 million by its controlling shareholder and said it had approved a new business plan to boost cash-generating activities by its ship-leasing business.

The moves are the latest in an ongoing process by companies across Batista’s energy, logistics and mining empire to retrench after missed profit and production targets and a consequent selloff by shareholders in recent months.

Sergio Spagnuolo from Reuters contributed to this article.

Icahn candidate Samuel Merksamer was voted onto the board of the world’s largest offshore oil rig contractor and shareholders removed Chairman Michael Talbert, Secretary Philippe Huber said at the Vernier, Switzerland-based company’s annual meeting today. Shareholders approved the company’s proposed $2.24-a-share dividend.

The company’s payment “represents one of the highest implied payout ratios and dividend yields in the industry,” Chief Executive Officer Steve Newman said on a May 9 earnings conference call. “We believe Mr. Icahn’s proposal is shortsighted, irresponsible and ignores the uncertainties the company currently faces.”

Icahn, the largest shareholder in Transocean with a 5.6 percent stake, began pushing for the dividend and potential board changes in January. In March, after Transocean proposed reinstating the dividend at $2.24 a share, Icahn announced his three board nominees for the company he said “has conducted ill-advised mergers, employed unsuccessful development strategies and squandered the substantial cash flow.”

Icahn’s interest in Transocean follows his takeover last year of oil refiner CVR Energy Inc., which announced a $5.50 special dividend in January. Icahn also pressured Chesapeake Energy Corp. for board changes and the natural gas producer replaced its chief executive officer last month.

Changing Boards

Icahn is one of several activist investors who have forced changes at energy companies in the past year. The Transocean vote comes one day after Hess Corp. reached a deal with Elliott Management Corp., agreeing to add three of the activist shareholder’s board nominees.

Occidental Petroleum Corp. Chairman Ray Irani, an executive at the oil company for almost three decades, was forced to step down this month after investors voted against him. SandRidge Energy Inc. agreed in March to make changes to its board after criticism from shareholder TPG-Axon Capital Management LP.

Transocean’s CEO will remain on the board along with fellow company-based nominees Robert Sprague, Frederico Curado and Thomas Cason.

Prior to the vote, Transocean said that Talbert would step down as chairman by a November board meeting. The former CEO pledged on May 13 to leave the board by the next annual shareholder gathering in 2014 after 19 years as a director.

‘Bear Responsibility’

“We believe that Michael Talbert, a long time incumbent, should bear responsibility for the long-term performance and outcome of strategic choices the company has made,” Institutional Shareholder Services said in an April 25 report.

The company said there weren’t enough shareholders present today to vote on an Icahn proposal to elect all board members every year, so the item was rejected.

Transocean halted dividend payments last year after its Deepwater Horizon exploded in the U.S. Gulf of Mexico. The company employed nine of the 11 workers who died in the April 2010 disaster that resulted in the biggest offshore oil spill in U.S. history. Transocean agreed to pay $1.4 billion to settle claims from the incident.

The company, which has 26 buy, 16 hold and two sell ratings from analysts, fell 0.6 percent to $54.40 at 12:32 p.m. in New York. The shares have gained 22 percent this year.

- David Wethe and Patrick Winters, Copyright 2013 Bloomberg.

“This is the largest active heave-compensated MacGregor offshore crane that has been ordered,” says Frode Grøvan, Director, Sales and Marketing for Advanced Load Handling. “At a time when subsea modules are getting larger and heavier and operations are being conducted at ever greater depths, a sophisticated crane on this scale equips the new vessel to meet the ever increasing demands of the offshore construction market.”

Sealion Shipping, a UK-based offshore support company that manages and operates offshore support vessels for Toisa, describes the MOCV as a customised version of an Ulstein Deepwater Enabler design. It says: “The DP 3 vessel is designed and equipped for worldwide operations in the oil and gas sector, ultra deepwater installation and construction, flexible lay, pipe lay, cable lay and topside construction support, and will be built to the highest standards and with maximum flexibility and capability prioritised”.

The crane delivery is planned for the beginning of 2015, with the vessel delivery following shortly afterwards in July.

Songa Eclipse, Image courtesy Songa Offshore

Investors in Songa Offshore (SONG:OSLO) reacted positively today to comments made by interim CEO and Chairman of the Board, Jens A Wilhelmsen.  Share prices were up over 5.5% to 6.32 NOK.

“The results show that we have now definitely put a challenging period behind us,” commented Mr. Wilhelmsen.  “I am proud and happy to hand Songa over to a new CEO in a state of profit. All rigs are operational with a very high utilisation, and we have good control of all business processes, including the Category D new build programme.”

In Songa’s Q1 earnings report released today, the Oslo-based offshore drilling contractor notes their strategy going forward “will be the continuous improvement of rig operations and to finance the new build program.”

The past 12 months has been pretty tough for Songa and their stock price has taken a beating from a high of nearly 18 NOK, to today’s price of around 6 NOK.

“With the upgrade projects on the rigs behind us, we are now in a position where we should generate a good cash flow from our existing rigs going forward.  This is very important with regards to the financing of our new build programme,” added Songa’s CFO, Geir Karlsen.

Songa Offshore reported a first quarterly profit of USD 9.4 million. EBITDA was USD 50.4 million.

Earnings per share (EPS) and diluted earnings per share (DEPS) for the first quarter were USD 0.05. Average number of shares for the quarter was 202,912,544 and as per period end the outstanding number of shares was 202,912,544.

During the first quarter, there were a number of significant events for Songa, including the sale of the Songa Eclipse to Seadrill, and the appointment of two new directors, Transocean’s EVP for Assets – Mr. Arnaud Bobillier and Mr Steven James McTiernan.

On 18 February, the Songa Trym completed its yard stay and entered into a 3+2 year contract with Statoil. On that same day, Bjørnar Iversen was recruited from Odfjell Drilling AS to eventually take over the reigns as Songa’s CEO on the 1st of June.

On 1 March it Songa announced that their F&G L-900 design semisubmersible drilling rig, Songa Venus entered into a contract extension and farm out agreement with Mubadala Petroleum from the current contract with Petronas. The extension will cover a total of four firm wells in Vietnam and Malaysia under the current contract terms and conditions. This extension will see Songa Venus occupied until October 2013 with an aggregated revenue value of approximately USD 21 million.

Contract revenue backlog at 31 March is USD 6.5 billion firm, with another USD 8.2 billion worth of options.

click for larger

Market Outlook

In their earnings report, Songa notes that the short term outlook for the midwater market is largely unchanged from the previous quarter. “Our optimism for increased demand is tempered only by the potential movement of rigs between regions in search of better markets. We will continue to closely monitor this evolving situation. The level of interest from clients remains robust and we are confident that several
of these projects will move forward to the tender phase in the coming quarter, providing an
environment for increased dayrates.”