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North Sea Rig Rates May Push Higher as Midwater Market Heats Up

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October 2, 2012

— By Gregory Lewis and Anthony Sibilia, Barron’s Online

Is the midwater-rig market poised for a pickup? We think so!

Increasing demand for midwater rigs (incremental demand of 13 rigs) coupled with tight supply (only eight newbuilds delivering through 2015) should see dayrates push higher into 2014. Currently there are about 40 deepwater rigs (includes 13 ultra-deepwater rigs) working in the midwater, which is keeping a lid on rates. However, with 15 of these rigs rolling off contract in 2013 and demand for deepwater rigs robust, we expect some of these rigs to leave the midwater, which should push dayrates higher.

The North Sea is where it is at. Not all rigs are created equal, with only 50% of the midwater fleet North Sea capable. This has helped average North Sea earnings outperform other basins by 18% in 2012. We expect average North Sea dayrates to continue to push higher next year (up 10%-20%).

Transocean (ticker: RIG) has the pole position. Transocean, Diamond Offshore Drilling (DO) and Ensco (ESV) have the most midwater exposure, with 12, nine and five rigs rolling off contract through 2014. Transocean is already off the line with its most recent North Sea fixture ($405,000 for 11 months—a 60%-plus dayrate increase from previous contract). Transocean also has the greatest exposure to the North Sea, with four rigs up for renewal through 2014. However, don’t forget about Diamond Offshore—they have one North Sea rig up for renewal and could play the upcycle with another midwater rig upgrade.

The traditional floater operators Transocean (about 30% market share) and Diamond Offshore (about 15% market share) have the most midwater rigs up for renewal through 2014. Transocean is by far the largest operator in the midwater with 35 rigs (10 stacked), followed by Diamond Offshore with 19 rigs (three stacked), Noble (NE) with eight rigs (one stacked) and Ensco with six rigs (one stacked). Should the midwater market pick up we could see some of the stacked midwater fleet return to service.

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